ECONOMIC DEVELOPMENT June of LATVIA 2015 REPORT

MINISTRY OF ECONOMICS REPUBLIC OF LATVIA

ECONOMIC DEVELOPMENT June OF LATVIA 2015 REPORT

RIGA

Ministry of Economics Republic of Latvia

ECONOMIC DEVELOPMENT OF LATVIA

REPORT

RIGA JUNE 2015

Comments, questions or suggestions are welcome:

Ministry of Economics of the Republic of Latvia Brīvības iela 55, Riga, LV-1519, Latvia

Phone: 371-67013293 Fax: 371-67280882 E-mail: [email protected] Website: http://www.em.gov.lv

Authors: O.Barānovs (overall compilation, 1., 4.1.1.), I.Skribāne (2., 3.1.3., 4.3., 5.2.), E.Gergelevičs (2., 3.1.4.), J.Salmiņš (2., 3.2.1., 3.2.2., 3.3.), L.Stelmaka-Leja (3.1.1., 3.1.2, 4.1.2., 4.1.3., 5.2.), G.Piņķe (3.3.), I.Šnīdere (4.2.), V.Skuja (4.4.), N.Ozols (5.1., 5.3.), A.Rožkalne, J.Ušpelis (5.4.), Č.Gržibovskis, R.Rimša (6.1.), G.Silovs (6.2.1., 6.8., 6.12.), D.Klinsone, M.Rone, L.Stauvere, D.Šikova (6.2.2.), M.Ivanova, V.Laizāns, A.Upīte (6.2.3.), K.Soms (6.3.), A.Leite, R.Meijers, I.Niedrīte (6.4.), R.Kņūtiņa, S.Soila, I.Strazdiņa, R.Špade (6.5.), M.Lūka, I.Šīrava (6.6), I.Lore (6.7., 6.8.), E.Fernāts (6.8., 6.12.), M.Jansons (6.9.), L.Neiders, (6.10.), I.Kabanova (6.11.), A.Krūze, M.Zondaks (6.12.), M.Ivanova, L.Kauliņa (6.13.), B.Mistre, J.Reinsone (6.14.), M.Drāke (6.15., 6.16.), D.Freimane (6.17.). All figures and data, unless indicated otherwise, have been obtained from the Central Statistical Bureau of the Republic of Latvia. The data of the European Union have been obtained from Eurostat. The data of the Bank of Latvia and the Financial and Capital Market Commission have been used in the description of balance of payments and the bank and monetary indicators of Latvia. The data of the Treasury have been used in the description of financial indicators.

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Dear reader,

The specialists of the Ministry of Economics have centralised examination in physics or chemistry in prepared a regular Report on the development of the secondary education. Likewise, the system for education national economy of Latvia. The first Report was issued of adults with clear financing model based on the needs in September 1994, the following Reports since 1995 of employers has to be established, and work-based were published traditionally twice a year – in June and learning shall be introduced in vocational education.

December. Like the previous Reports, this one assesses The new programming period of the EU funds gives the economic situation, as well as provides forecasts on us an opportunity to invest 4.4 billion euro in the growth the prospects for growth of economy. and development of Latvia over the next seven years. It The gross domestic product in Latvia has increased should be noted that the planned most crucial aims of by 17.4% from 2010 to 2014, and it has been the most financing provided by the EU funds include increasing rapid increase among all Member States of the European the financial flow in research and development, Union. It gives evidence that the reforms in general have promoting the attraction of private investments, and been correct. However, we should not relax even for a activating co-operation between research institutions and while, as the global economic situation is rather fragile. entrepreneurs. Significant investments are planned for We see that the pace of growth slows down in Latvia the improvements of information and communications mainly due to geopolitical reasons, as well as the technologies and transport infrastructure which directly increasing competition within the domestic market of the affect the economic productivity, form the basis for the European Union. creation of new and well-paid jobs and increase in the In 2015, the economic growth of Latvia will be quality of living. closely related to global tendencies in our geopolitical Within the framework of activities implemented by region. The economic situation in the export market that the Ministry of Economics, approximately 800 million is so important for Latvia – in the EU – gradually euro will be available for targeted investments in the improves, while the exporters focusing on the Eastern modernisation and industrialisation of the Latvian markets are affected by the worsening economic situation economy. A significant increase of the EU funding is in Russia. Unfortunately, the consequences of the envisaged for promoting efficient use of energy, investing geopolitical issues will impede the economic growth in more than 300 million euro in the increase of energy Latvia also this year. Experts of the Ministry of efficiency in multi-apartment residential houses, public Economics forecast that the GDP growth might be and industrial buildings within the programming period. approximately 2% in 2015. In 2015, it is planned to launch such EU funding The geopolitical situation in the region and slow activities as Introduction of New Products and Technologies into growth of the economy in the European Union hinder Production (support for procurement of the equipment), investments and the increase of the export. Under such Access to International Trade Markets (participation in conditions, the most important role in promoting the exhibitions), Promotion of International Competition (national economic growth of Latvia is attributed to the ability to stands), Training of Employees, Competency Centres, Business improve competitiveness and ensure the accessibility of Incubators and Improvement of Heat Insulation of Multi- financial resources at all stages of business development. Apartment Residential Buildings.

It is crucial to find the most effective ways to support It is essential to maintain the existing and develop the development of a knowledge-intensive economy, to new tax stimuli so that businesses would be willing to increase the competitiveness of companies across invest in the development of new and more profitable exporting sectors, to increase productivity and innovation products. The enterprise income tax exemptions capacity. The economic policy supporting the currently are applied to investments in procurement or development of the regions of Latvia, including creation development of new technological equipment for of new, well-paid jobs in the regions, will be just as production, research and development and large important. investment projects. It shall be noted that on 19 May this In order to prepare for and adapt to the significant year the Cabinet of Ministers upon proposal of the structural changes, it is necessary to undertake proactive Ministry of Economics restated and approved “The steps in the labour market. The Ministry of Economics Procedures of Approving and Implementing an Aided holds a view that the reforms started in the education Investment Project” that allow to continue the provision system shall be carried on, focusing on the increase of the of the state support to large investors as far as until 1 quality of acquisition of the physical and natural sciences October 2020. in the primary and secondary education, as well as on the To promote economic activities, it is significant that development of adult education. It is necessary to after long discussions we have managed to maintain the improve the contents of the subjects of the physical and micro enterprise tax, at the same time the social insurance natural sciences and introduce a mandatory elective of the employees of such companies has been improved.

One of the priorities of the Ministry of Economics is The representatives of the Ministry of Economics and to improve business environment. The latest World Bank government institutions under its supervision continue research Doing Business 2015 has ranked Latvia 23rd among working on accession to the OECD, so that Latvia can 189 countries or 9th among the EU Member States. The become a full member of the OECD. In 2015, an in- World Bank has recognised Latvia as one of the TOP30 depth review on compliance of Latvia to the OECD countries that have implemented major reforms to guidelines regarding management of the state capital, the improve the business environment. Report on the Economy of Latvia and the Report on the Latvia has improved its performance in the fields of Consumer Policy in Latvia have been prepared and tax payment and real estate registration. Yet, in order to distributed. The Ministry of Economics actively takes improve the quality of the Latvian business environment part in development of new instruments, development of as fast as possible, it is essential to continue reforms in positions and policies in the area of its competence the judiciary, particularly in the area of commercial pursuant to the OECD guidelines and recommendations. dispute resolution and simplification of the insolvency The integration of the Latvian energy market in procedure. It is also necessary to reduce the bureaucracy Europe continues. The provisions of the Electricity Market burden on tax administration purposefully by reducing Law have already come into force, ensuring complete the number of procedures and the time required for opening of the electricity market. At the same time, we them. The quality and speed of implementation of the have launched a support provision system for poor and reforms will determine further competitiveness of the low-income households, as well as for families with many Latvian business environment and economy. Our target children, compensating for changes in electricity prices. in the coming years is to be among Top 20 countries in Likewise, the Ministry of Economics has implemented terms of favourable business environment. complex measures in order to restrict further increase of The Ministry of Economics continues its work on the the mandatory procurement component in the price of regulatory framework for protection of consumers. On electricity until 2017, maintaining it at the level of 2013. the 1st of July this year, the amendments to the Unfair The Ministry of Economics actively develops the Commercial Practice Prohibition Law and Advertising Law will regulatory framework for energy efficiency policy. The come into force; they will extend the powers of the Cabinet of Ministers has reviewed the draft Energy Consumer Rights Protection Centre and other Efficiency Law aiming at cost-effective energy efficiency at supervising authorities in the events of unfair commercial all stages of the energy chain from its production to its practice, as well as increase the maximal amount of final consumption. Energy efficiency shall be considered penalty for unfair commercial practice. the largest energy resource, and its implementation is a The Ministry of Economics continues introducing method that shall be efficiently used to increase the regulatory enactments arising from the new Construction security of supply and reduce greenhouse gas emissions. Law by carrying out the complete adaptation of the Increase in energy efficiency definitely is the fastest and Eurocode Standards and inclusion of requirements the most cost-effective way of mitigation of risks, contained in the Latvian National Annexes in the regulatory creating additional jobs and fostering growth at the same system governing the construction sector. Thus, a time. modern and strict regulation of the sector is developed Currently, the liberalization of the gas market is in the which will ensure higher quality of construction at all agenda in order to develop the framework for open stages. operation of the gas market as of April 2017. At the same time, the supervision of the construction In addition to the improvement of the provisions of control is improved, and the State Construction Control regulatory enactments regarding energy market, active Office has started its operation. It carries out public work is performed in the area of the development of supervision of new public buildings and their operations. energy and gas infrastructure and attraction of In 2015, the Ministry of Economics continues investments for the existing and future infrastructure reforms in the area of the management of commercial projects in order to strengthen energy security and activities of public persons and capital shares. The Law on diversify energy supply. Management of Capital Shares and Capital Companies of Public The main aim in the energy sector for the period until Persons has already come into force. It has been developed 2020 is to strengthen the energy independence of Latvia, to ensure professional and transparent management of to increase the energy supply security, to promote energy state capital companies and capital companies of derived sustainability, and to ensure competitive energy prices to public persons, including local governments, as well as to consumers. improve the performance of the said capital companies. To achieve the set aims, we are actively engaging in a The Law on Management of Capital Shares and Capital dialogue with entrepreneurs, non-governmental Companies of Public Persons is the fundamental law of this organisations and other representatives of the society. It reform. Its implementation is vital for the acceptance of is particularly significant during the period when Latvia is Latvia in the Organization of Economic Cooperation the presiding country in the Council of the European Development (OECD). Union.

The present Report provides information regarding I would like to express my gratitude to the authors of the main economic and social indicators, the the Report. development of economic sectors and global economic June 2015 environment, the economic policy of the government and its key instruments for implementing the policy, including the utilisation of the EU structural funds. The Cabinet of Ministers has not assessed all issues discussed in the Report, therefore a range of conclusions on the economic growth of the country and recommendations for further activities reflect solely the opinion of the experts of the Ministry of Economics.

Dana Reizniece-Ozola, Minister of Economics

CONTENTS

Abbreviations, Measurement Units, and Symbols ...... 7

1. Economic Situation: Brief Overview ...... 9

2. Global Economic Environment...... 14

3. Growth ...... 18 3.1 Gross Domestic Product and Aggregate Demand ...... 18 3.1.1 Development Trends ...... 18 3.1.2 Private and Public Consumption ...... 19 3.1.3 Investments ...... 21 3.1.4 Exports and Imports ...... 25 3.2 Contribution of Sectors ...... 31 3.2.1 Development Trends of Sectors ...... 31 3.2.2 Manufacturing ...... 35 3.3 Forecasts ...... 49

4. Macroeconomic Stability ...... 51 4.1 Public Finances ...... 51 4.1.1 Fiscal Policy and Public Debt ...... 51 4.1.2 Budget Revenues ...... 54 4.1.3 Budget Expenditures ...... 58 4.2 Prices ...... 60 4.2.1 Consumer Prices ...... 60 4.2.2 Producer Prices ...... 63 4.2.3 Foreign Trade Unit Value Indices ...... 65 4.3 Balance of Payments ...... 66 4.3.1 Current Account ...... 66 4.3.2 Financial Flows ...... 68 4.3.3 Foreign Direct Investments ...... 69 4.4 Financial and Capital Markets ...... 72 4.4.1 Monetary Policy ...... 72 4.4.2 Market Structure and Development ...... 73 4.4.3 Assets, Deposits and Loans ...... 74

5. Labour Market ...... 78 5.1 Employment and Unemployment ...... 78 5.2 Labour Costs and Productivity ...... 81 5.3 Labour Market Forecasts ...... 85 5.4 Employment Policy ...... 87

6. Economic Policy and Priorities of Structural Policy ...... 93 6.1 Europe 2020 Strategy and the National Reform Programme of Latvia ...... 93 6.1.1 Europe 2020 Strategy and its Progress ...... 93 6.1.2 National Reform Programme of Latvia for the Implementation of the Europe 2020 Strategy ...... 95 6.2 Integration of Latvia in the Economic Policy of the EU ...... 97 6.2.1 Utilisation of the European Union Structural Funds and the Cohesion Fund ...... 97 6.2.2 Foreign Trade Policy ...... 103 6.2.3 Internal Market of the European Union ...... 107 6.3 Industrial Policy ...... 109 6.4 Energy Policy ...... 112 6.5 Construction and Housing Policy ...... 123 6.6 Tourism Policy ...... 126 6.7 Improvement of Business Environment ...... 128 6.8 Small and Medium-Sized Enterprises ...... 130 6.9 Innovation and New Technologies ...... 136 6.10 Information Society ...... 140 6.11 Competition Policy ...... 145 6.12 Export Promotion and Foreign Investment Attraction Policy ...... 148 6.13 Consumer Rights Protection and Market Surveillance ...... 150 6.14 Quality Assurance ...... 154 6.14.1 Quality Structural Policy ...... 154 6.14.2 Accreditation, Standardisation, Metrology ...... 154 6.15 Privatisation ...... 157 6.16 Reform for Management of Commercial Activities of Public Persons and Capital Shares ...... 161 6.17 National Economy Council ...... 163

7. Recommendations ...... 166

ABBREVIATIONS, MEASUREMENT UNITS AND SYMBOLS

Abbreviations

CC Competition Council HGP Heat-electric generating plant CF Cohesion Fund HPP Hydroelectric Power Plant CIF Price of goods created by the value of ICT Information and Communication goods inclusive of freight and Technologies insurance costs till the border of the IDAL Investment and Development Agency importing country of Latvia CIS Commonwealth of Independent States IGC Intergovernmental commission CLC Central Land Commission IMF International Monetary Fund CoM Cabinet of Ministers JSC Joint Stock Company CPI Consumer Price Index LGA Latvian Guarantee Agency CRPC Consumer Rights Protection Centre LLC Limited Liability Company CSB Central Statistical Bureau LNAB Latvian National Accreditation Bureau EAGGF European Agricultural Guidance and LTDA Latvian Tourism Development Agency Guarantee Fund LVS Latvian Standard EC European Commission MSS Meeting of the State Secretaries ECC The European Consumer Centre of Latvia NEC National Economy Council of the Ministry of Economics ERDF European Regional Development Fund NPP Nuclear Power Plant ESF European Social Fund OP Operational Programme EU European Union PJ Petajoule EU-15 European Union Member States before the enlargement on May 1, SEA State Employment Agency 2004 SMEs Small and Medium-Sized Enterprises EU-27 European Union Member States after SMM Small and Medium-Sized Merchants the enlargement on January 1, 2007 SOLVIT EU Internal Market Problem Solving FDI Foreign Direct Investment System FIFG Financial Instrument for Fisheries SRS State Revenue Service Guidance TPI Trade Protection Instruments FOB Price of the goods, including value, and transport and insurance costs to TWh Terawatt hour the border of the exporting country USA The United States of America FTA Free Trade Agreement WTO World Trade Organization GDP Gross Domestic Product

Country Abbreviations

AT Austria IE Ireland BE Belgium IT Italy BG Bulgaria LT Lithuania CZ Cyprus LU Luxembourg CY Czech Republic LV Latvia DE Germany MT Malta DK Denmark NL The Netherlands EE Estonia PL Poland EL Greece PT Portugal ES Spain RO Romania EU European Union SE Sweden FI Finland SI Slovenia FR France SK Slovakia HR Croatia UK United Kingdom HU Hungary

1. ECONOMIC SITUATION: BRIEF OVERVIEW – 9 –

1. ECONOMIC SITUATION: BRIEF OVERVIEW

A substantial inflow of foreign capital from 2005 to increased by 2.4%. The decrease in the growth rate was 2007 stimulated significant increase in the private determined by external tendencies: growth in the EU was consumption and investments in Latvia. The average not as rapid as expected, as well as the economy of growth rate of the GDP exceeded 10%. In 2008 and Russia became weaker. Although the economy in Latvia 2009, the recession set in as the foreign capital inflow has been growing in recent years, the GDP is still by 5% stopped due to the global financial crisis. During the lower than it was before the crisis in 2007. crisis, the GDP decreased by ¼, the external debt almost In the 1st quarter of 2015, the GDP was by 0.3% doubled, the number of employed decreased by 16%, the higher than in the previous quarter (according to actual wages of the employed – by 12 per cent. seasonally adjusted data) and by 1.9% higher than a year Since the end of 2009, the economic recession in ago. It can be assessed as a good indicator, taking into Latvia has been stopped, and the growth has account the unfavourable geopolitical situation in the resumed. From 2011 to 2013, the GDP increased on region. The specialists of the Ministry of Economics average by 4.7% annually, and it was one of the most forecast that the increase of the growth of the GDP rapid economic growths in the EU. In 2014, the GDP will be within 2% in 2015. Table 1.1

Latvia: Key Indicators of Economic Development 2008 2009 2010 2011 2012 2013 2014 2015f 2016f

Gross Domestic Product (current prices, billion EUR) 24.4 18.9 18.2 20.3 22.0 23.2 24.1 24.8 26.1

increase when compared to the previous year, in per cent

Gross domestic product -3.2 -14.2 -2.9 5.0 4.8 4.2 2.4 2.0 3.0 Private consumption -8.0 -16.2 3.1 2.9 3.0 6.2 2.3 2.2 2.7 Public consumption 2.4 -10.7 -8.1 3.1 0.4 2.9 3.4 2.8 0.7 Gross fixed capital formation -9.2 -33.3 -20.0 24.2 14.5 -5.2 1.3 0.4 2.2 Exports 2.4 -12.9 13.4 12.0 9.8 1.4 2.2 1.6 2.6 Imports -10.7 -31.7 12.4 22.0 5.4 -0.2 1.6 1.5 0.5 Consumer prices 15.4 3.5 -1.1 4.4 2.3 0.0 0.6 0.9 2.0

% of the gross domestic product, unless indicated otherwise

General government sector balance -4.0 -9.0 -8.1 -3.3 -0.8 -0.7 -1.4 -1.5 -1.2 General government debt 18.6 36.4 46.8 42.7 40.9 38.2 40.0 37.0 40.0 Export-import balance -13.6 -1.5 -1.5 -5.0 -4.4 -2.9 -2.9 -2.3 -1.7 Changes in the number of the employed (aged 15-74 years, compared to the previous year, %) -0.2 -13.9 -6.4 1.3 1.6 2.1 -1,0* 0.2 0.5 Employment rate 62.0 54.3 52.0 54.0 56.1 58.2 59.1 60.0 61.0 Unemployment rate (share of unemployed persons to the number of economically active population, aged 15-74 years, %) 7.7 17.5 19.5 16.2 15.0 11.9 10.8 9.8 8.7 f – forecast * As of 2014, the methodology for Labour Force survey has been modified. For generalization of the quarterly data, the quarterly average number of inhabitants living in private households is used (formerly – number of the inhabitants at the beginning of a year)

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY OF LATVIA | JUNE | 2015 – 10 – 1. ECONOMIC SITUATION: BRIEF OVERVIEW

Since 2010, exports of the goods and services As the situation in the budget has improved, the from Latvia have increased rapidly, and it has been public consumption has started to grow. In 2013, the the main driving force of the national economy. The amount of public consumption increased by 2.9%, but in amount of exports currently exceeds the level of exports 2014 – by 3.4%. Similar rate of increase was observed before the crisis for more than 25%. However, the low also during the 1st quarter of 2015. demand in the foreign markets of the recent years has In recent years, the dynamics of investments in Latvia affected the dynamics of the exports, and it has become have been rather unstable. During the crisis in 2008-2009, moderate. In 2013, the amount of exports increased only the investments decreased considerably, while in 2011- by 1.4%, but in 2014 – by 2.2%. In 2014, the increase was 2012 they increased significantly. In 2013, the amount of mainly determined by the increase of exports of goods, the investments in the national economy of Latvia but the amount of exports of services decreased. decreased again – by 5.2%. In 2014, the dynamics of the In the 1st quarter of 2015, the total amount of exports investments were moderate, and the amount of was by 3.5% higher than a year ago. The economic investments was by 1.3% higher than a year ago. The problems in Russia have affected the possibilities of level of investments still is significantly lower than during exports of Latvia: in the first quarter of this year, the the years before the crisis. The increase rate of the amount of exports to Russia in actual prices was by investments is comparatively low due to the cautious 28.5% lower than a year ago. At the same time, while the attitude of entrepreneurs regarding the increasing economic situation in the EU improved, the exports of uncertainty of the external factors. Low crediting level is Latvia to those countries increased by 4%. Exports to still one of the factors limiting the investments. It shall be third countries increased as well at the beginning of the noted that the role of the state is important for the year, showing that the Latvian manufacturers are able to investment process – in the circumstances of poor diversify their markets. In the first quarter of 2015, the crediting options the state ensures significant support to volume of exports of services increased as well. private investments using co-financing of the EU Further development of exports will be affected not structural funds. only by the changes in the global demand, but also by the In recent years, the poor demand of export competitiveness of the Latvian manufacturers. It has to markets has been slowing down the growth of the be taken into account that the improvement of the manufacturing industry. After the crisis, the competitiveness of Latvia so far has occurred due to cuts manufacturing industry was the main driving force of the in labour costs; however, further improvement of development of the national economy. From 2009 until competitiveness will depend on the ability to raise the end of 2012, the volume of production in the productivity. manufacturing industry increased by 24%. In 2013, the During the crisis, the amount of imports rapidly production volume in the manufacturing industry dropped due to decrease in the domestic demand. The remained at the level of 2012. The termination of the demand for imports grows along the increase in operation of “Liepājas Metalurgs” in 2013 had a economic activities in the domestic market. Yet, the significant impact on the output of the industry, and, as a dynamics of imports has become rather moderate since result, the volume of production of metal decreased the middle of 2012. In 2014, imports increased only by considerably. In addition, the amount of the goods 1.6 percent. produced in 2014 was close to the one of the previous The external deficit on trade of goods and services in year. In the 4 months of 2015, the output volume of the 2013 and in 2014 was 2.9% of the GDP. The current manufacturing industry increased rapidly and was by account deficit in 2013 was 2.3% of the GDP, but in 6.3% higher than a year ago. 2014 – 3.1%. It shall be noted that current account Individual sub-sectors continue to grow steadily, but deficit in Latvia has been low since 2010 that gives the production volume of other sectors decreases due to evidence of the external balance of the economy in several factors. Production volume keeps growing in the Latvia. largest industry sector – wood processing. Production

Domestic demand has contributed much to the volumes increased by 6.9% in 2014. In the 4 months of growth. The increase in employment and gradual 2015, the production volumes were by 8.2% higher than increase of wages fosters the growth of the private a year ago. The metalworking sector has significantly consumption. In 2013, the amount of private contributed to the growth of the manufacturing industry consumption increased by 6.2%, but in 2014 – by 2.3%. at the beginning of 2015; it was because one of the largest In the 1st quarter of 2015, the total amount of private industrial companies “KVV Liepājas Metalurgs” resumed consumption was by 2.6% higher than a year ago. Like its operation. The production volumes in the food sector the overall growth of the economy, the dynamics of the in 2014 remained at the level of the previous year, but the growth of private consumption has become moderate. output volume in January-April 2015 was by 5.1% lower than a year ago. The economic relationship between the EU and Russia has a significant impact on the development of the sector. The production of computers, electrical and optical equipment experienced the most rapid increase in the production volume in 2014

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY OF LATVIA | JUNE | 2015 1. ECONOMIC SITUATION: BRIEF OVERVIEW – 11 – and at the beginning of 2015. The production volumes in In recent years, a moderate inflation has been light industry, manufacture of non-metallic mineral observed in Latvia. In December 2014, the prices products, manufacture of paper, printing and publishing increased by 0.2% (12-months inflation) if compared to industry and chemical industry decreased. December 2013. The increase in consumption prices

The largest contribution to the increase of the during the year was mainly influenced by the rise in prices GDP over the past years was ensured by the sectors for the services; they grew by 3.3% and increased the focusing on the domestic demand. After significant overall level of the prices by 0.9 percentage points. The recession during the crisis, the construction sector has major decreasing factor during the year was the drop in resumed its growth that is fostered largely by public fuel prices (by 12.3%), it decreased the overall level of procurements and the EU funded projects. In 2013, the consumer prices by 0.8 percentage points. At the end of volumes of construction increased by 7.5%, mainly due December, the global oil prices reached the lowest level to the increase in the engineering construction volume. In during the last five and a half years; the global oil price 2014, the building volume kept growing: it increased by decreased by 50% over the year. A more rapid drop of 8.1%. The growth largely was fostered by a rapid increase the fuel prices was delayed by the increase in the of the construction of buildings in the first half of the exchange rate of the US dollar against the euro. In year. However, the latest statistical data show that the addition, the drop in food prices (by 0.8%) had a large growth of the construction sector in 2015 is expected to impact. It decreased the overall level of consumer prices be moderate. by 0.2 percentage points. The global food prices In 2013, the volume of the commercial services decreased by 8.5% over the year and it was due to a rapid sectors increased by 6%, and taking into account the drop of dairy product prices. The drop in food prices in significant share of the sectors, it accounted for almost a Latvia was further influenced by the embargo imposed by half of the overall growth of the national economy. Russia on specific products as of August 2014. In 2014, However, in 2014, the volume of services in the average annual inflation increased by 0.6 per cent, if commercial services sector grew more slowly – by 1.3%. compared to the inflation in 2013. The increase in the volume in 2014 mainly was affected In 2015, the inflation is mainly related to the by the growth of the financial and insurance activities, as dynamics of oil and food prices in the world. In May, well as in art, entertainment and recreational services consumer prices were by 1.2% higher than a year ago. In sectors. A moderate growth was observed in the 2015, average annual inflation may grow a little more rapidly than in the last year. information and communication services sector. As the expenditure of the government increased, a After facing the financial market crash at the end of steady increase was observed in public services sectors in 2008 and at the beginning of 2009, the monetary 2013 – by 3.8%, but in 2014 – by 3.3 per cent. indicators of Latvia have been gradually stabilising: the In other industry, the production volume decreased quality of credit portfolio has been improving and the both in 2013 and 2014, by 3.3% and 2.5% respectively. It amount of deposits attracted by banks has been growing. is mainly related to the weather, as less electric power and The amount of loans with overdue payments in the total heat energy was produced in comparison to the previous loan portfolio was 13.1% in the 1st quarter of 2015, which periods. is the lowest indicator since the end of 2008. The In the trade sector (including accommodation and improvement of the credit portfolio of the banks is catering services) the amount of services provided in largely related to writing-off of the bad debts. 2013 increased by 4.8%. They kept growing also in 2014, The volume of the deposits of the residents attracted however, the pace of growth was slower – 2.3%. The by the banks keeps growing. Due to the planned trading sector is fostered by the increase in the private introduction of the euro, the deposits increased very consumption and retail turnover, while weak foreign rapidly at the end of 2013. At the end of March of 2015, trade activities slow down the growth of the wholesale. the volume of the deposits increased by 17.2%, if In the transport sector, the growth reached 1.6% in compared to the volume of the deposits of the same 2013, and it was fostered by the increase in the freight period in 2014. turnover in road transport. In 2014, the volume of However, the balance of credits keeps decreasing, services provided in the sector was by 3.3% higher than a though the negative trends become slower. This is mainly year ago. The increase of this sector in 2014 was fostered due to repayment of the previously granted credits and largely by successful operation of the ports and increase writing-off of bad credits. At the end of March of 2015, in the freights carried by road transport. At the beginning they have decreased by 3.5% if compared to the same of 2015, the volume of services provided in the transport period in 2014. The balance of mortgage and industrial sector decreased – by 1.6% in the 1st quarter. The loans shrank more rapidly. Meanwhile, the balance of decrease was largely determined by the drop in the freight commercial loans increased a little. In terms of volumes, turnover in railway and ports. more loans were granted for operations with real estate and in the manufacturing industry.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY OF LATVIA | JUNE | 2015 – 12 – 1. ECONOMIC SITUATION: BRIEF OVERVIEW

The fiscal situation in the country is stable. In In the 1st quarter of 2015, the number of employed 2014, the general government budget deficit was 1.4% of people increased by 0.3%, and the employment rate the GDP or 347 million euro that is by 0.4 percentage increased by 1.1 percentage point, if compared to the points more than planned in the Stability Programme for corresponding period of the previous year. The Latvia of the previous cycle. The reason for such unemployment rate, however, dropped by 1.7 percentage deviations is a single transfer of capital for fulfilment of points – to 10.2% in the 1st quarter of 2015, if compared the obligations of the general government towards the to the corresponding period in 2014. European Reconstruction and Development Bank. In addition, the registered rate unemployment keeps Pursuant to the Stability Programme for 2015-2018 decreasing – it was 8.6% at the end of May of 2015. 81 submitted to the European Commission, expected thousand unemployed people were registered, which is by general government budget deficit in 2015 is 362.1 7 thousand less than in May 2014. The highest registered million euro or 1.5% of the GDP. In the state budget of unemployment rate remained in Latgale region (18.9%), 2015, the following measures are determined as priority: but the lowest – in Riga (5%). Almost one third of the strengthening of state social and national security, total number of registered unemployed was long-term sustainable development of the economy in Latvia that unemployed (jobless for more than a year). would improve well-being of the society, as well as the Comparatively high unemployment rate is related to measures to facilitate competitiveness of commercial cyclic factors; however, the structural unemployment rate activity. remains high. Some of the unemployed people may Ensuring the stability of the tax policy and taking into experience long-term problems in finding a job, as new account the commitment to decrease the labour force tax jobs are not the same that were lost during the crisis. burden, the personal income tax rate has been decreased The specialists of the Ministry of Economics forecast from 24% to 23% as of 1 January 2015. The that, in total, the number of employed people in 2015 contributions into the second level pension plan have may increase by 0.2%, but the unemployment rate been increased from 4% to 5%. As of 1 January 2015, the may be close to 10 per cent. minimum wage is also increased from 320 to 360 euro. It The correction of wages during the crisis was is one of the ways of implementing the strategic objective comparatively moderate; the most part of the drop of the of the national development: to decrease social inequality economy volume was compensated by the decrease of of the inhabitants. As of 2016, it is planned to introduce the number of employed people. As the economic the differentiated non-taxable minimum. situation has stabilized, wages have resumed growing Following the approval of the Fiscal Discipline Law since the end of 2010. (FDL) at the beginning of 2013, the national fiscal policy Average gross wage in 2013 increased by 4.5%, but in framework is based on the concept that envisages 2014 – by 6.8%, and it reached 765 euro. A rapid increase ensuring of balanced budget within an economic cycle, in wages was observed in the 1st quarter of 2015: the meaning that the volume of the structural budget balance average gross wage increased by 6.1% if assessed over the of the general government does not exceed -0.5% of the year. GDP as it is envisaged by the FDL. Latvia reached the Since 2010, the wages have increased in both the structural deficit of 0.5% of the GDP in 2012. Thus, the private and public sectors. It should be noted that the task for the following years is to maintain the structural annual gross wage in the public sector in 2014 was only deficit at the level of the middle-term targets. by 0.8% higher than in 2008, but it exceeded the level of Increase in the economic activities has a positive 2008 by almost 19% in the private sector. impact on the situation in the labour market: the Thus, along the increase of nominal wages, the actual unemployment rate caused by the crisis falls, while the wage increases gradually as well. Since 2013, the increase employment rate rises. At the same time, certain of the actual wage has become more rapid. In 2013, the population groups, especially people having a low level of actual wage increased by 5.6%, but in 2014 – by 8%. In education and qualification, elderly people, as well as the 1st quarter of 2015, the actual wage increased by young people, may have only a slight improvement. The 6.8%. Since 2013, the increase of the actual wage was pace of improvements also becomes slower due to the determined by the rapid increase in the nominal wage, as gradual decrease of the base effect in the labour market, well as slow increase in consumer prices. as well as drop of the pace of growth related to the Further development of the national economy in external tendencies. Latvia still will be closely related to export possibilities; In 2014, the situation in the labour market kept therefore, the major risk of the development of improving, though more slowly than in the previous Latvia is related to the development of the global periods. The unemployment rate decreased to 10.8%, economy. which was by 1.1 percentage points less than in 2013, but The growth of the national economy in the middle- the employment rate increased by 0.9 percentage points – term will depend on several factors. As Latvia is a small up to 59.1%. In total, 884.6 thousand people were open economy with a relatively high level of market employed in 2014, but 107.6 thousand people were liberalization, its growth significantly depends on the looking for a job; the latter is less by 12.7 thousand than development of the global economy and the maintenance in 2013.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY OF LATVIA | JUNE | 2015 1. ECONOMIC SITUATION: BRIEF OVERVIEW – 13 – of a stable competition. The dynamics of the The rapid growth scenario envisages that the most development of the economy of the EU and important export markets of Latvia will resume their improvement of the geopolitical situation created by the growth, and the advantages of the competitiveness of the crisis in Ukraine is especially important. The economic economy in Latvia are mainly based on technological strengths of Latvia in the middle term will mainly be factors, improvement of production efficiency and based on the macroeconomic stability achieved, as a innovations, to a less extent – to cheap labour force and result of which the credit rating of Latvia has improved, low prices of resources. In the middle term, the pace as well as on the basis of the efficiency of the planned of growth of Latvia may reach the annual increase of support programmes of structural funds and 4-5%. The scenario of weaker growth, however, improvements in business environment. envisages that the pace of growth of Latvia could be much slower if the growth of Europe remains slow and the geopolitical situation created by the crisis in Ukraine does not improve.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY OF LATVIA | JUNE | 2015 – 14 – 2. GLOBAL ECONOMIC ENVIRONMENT

2. GLOBAL ECONOMIC ENVIRONMENT1

Global economic growth was moderate in 2014, as it confidence among businesses and consumers. It should increased in the developed countries and slightly slowed be noted that up until now the U.S. economy has been down in the developing countries. Despite the slower resilient to the unfavourable external environment and growth, the contribution of the developing countries to strengthening of the USD exchange rate. global growth was still very significant. Global growth Table 2.1 was facilitated by gradual recovery of demand, decrease in oil prices, measures of monetary expansion etc. Still, GDP Growth geopolitical tensions in some regions, as well as such (% compared to the previous year) fundamental factors as the slowing down of growth 2013 2014 2015f 2016f potential and ageing society are still significant hurdles for growth. World 3.3 3.4 3.5 3.9 The European Commission forecasts that in 2015 the including: global economy will grow by 3.5%, whereas in 2016 the USA 2.2 2.4 3.1 3.0 growth rate will increase to 3.9 per cent. Japan 1.6 0.0 1.1 1.4 In 2014, stable growth was observed in the economy of the USA, although it slowed down in late 2014. This EU 0.0 1.4 1.8 2.1 growth slowdown was related to increased imports and a including: higher USD value. The GDP in 2014 in total was by Euro area -0.4 0.9 1.5 1.9 2.4% higher than in 2013. Russia 1.3 0.6 -3.5 0.2 At the beginning of 2015, the U.S. economy growth was also slightly slower than expected, as well. The China 7.6 7.4 7.0 6.8 growth is still positively influenced by the low price of oil, Source: European Commission- European Economic Forecast, Spring 2015 development on the labour market and improvement in f – forecast Figure 2.1

Breakdown of the World's GDP by the Groups of Countries (structure, GDP by purchasing power parity units) 2007 2014

Other Other countries USA countries USA 19% 19% 20% 16%

South South Euro area America America 12% 9% Euro area 9% 15% Rest of Rest of Other EU Asia Asia countries 6% 6% 5% Other EU CIS Japan Japan countries 5% 5% India CIS 4% China 6% India China 5% 5% 11% 7% 16%

Source: The World Economic Outlook April 2015, International Monetary Fund 1

1 The following publications have been used in preparation of this section: European Commission- European Economic Forecast, Spring 2015; International Monetary Fund- World Economic Outlook, April 2015

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 2. GLOBAL ECONOMIC ENVIRONMENT – 15 –

Further growth in the USA will remain slightly above Japan – it slowed down: overall growth rate in the region the potential level. The situation on the labour market in 2014 was slightly slower than in the previous years. will continue to improve, and energy prices will stay low. Decrease of demand in China, Japan and countries in the Growth will be also stimulated by a favourable monetary euro area negatively influenced the growth of export and fiscal policy. However, it should be noted that, in the from the Asian region, which was partially compensated short term, the growth will be slightly weaker than by growth of demand in the USA. Growth of investment expected. was also slower, especially in China, mainly due to Asian countries remain leaders in global growth. adjustments on real estate markets. Private consumption Although growth accelerated in many states within the being the main driving force of growth in majority of region, in its largest economies – China, Indonesia and countries in the region (excluding Japan) remained stable. Table 2.2

Main Macroeconomic Indicators of EU Member States (per cent) GDP growth Consumer prices Unemployment 2014 2015f 2016f 2014 2015f 2016f 2014 2015f 2016f

EU 1.4 1.8 2.1 0.6 0.1 1.5 10.2 9.6 9.2 Austria 0.3 0.8 1.5 1.5 0.8 1.9 5.6 5.8 5.7 Belgium 1.0 1.1 1.5 0.5 0.3 1.3 8.5 8.4 8.1 Denmark 1.1 1.8 2.1 0.3 0.6 1.7 6.6 6.2 5.9 France 0.4 1.1 1.7 0.6 0.0 1.0 10.3 10.3 10.0 Greece 0.8 0.5 2.9 -1.4 -1.5 0.8 26.5 25.6 23.2 Italy -0.4 0.6 1.4 0.2 0.2 1.8 12.7 12.4 12.4 Ireland 4.8 3.6 3.5 0.3 0.4 1.5 11.3 9.6 9.2 United Kingdom 2.8 2.6 2.4 1.5 0.4 1.6 6.1 5.4 5.3 Luxembourg 3.1 3.4 3.5 0.7 0.8 2.1 5.9 5.7 5.4 The Netherlands 0.9 1.6 1.7 0.3 0.2 1.3 7.4 7.1 6.9 Portugal 0.9 1.6 1.8 -0.2 0.2 1.3 14.1 13.4 12.6 Finland -0.1 0.3 1.0 1.2 0.2 1.3 8.7 9.1 9.0 Spain 1.4 2.8 2.6 -0.2 -0.6 1.1 24.5 22.4 20.5 Germany 1.6 1.9 2.0 0.8 0.3 1.8 5.0 4.6 4.4 Sweden 2.1 2.5 2.8 0.2 0.7 1.6 7.9 7.7 7.6 Bulgaria 1.7 1.0 1.3 -1.6 -0.5 1.0 11.4 10.4 9.8 Czech Republic 2.0 2.5 2.6 0.4 0.2 1.4 6.1 5.6 5.5 Croatia -0.4 0.3 1.2 0.2 0.1 1.3 17.3 17.0 16.6 Estonia 2.1 2.3 2.9 0.5 0.2 1.9 7.4 6.2 5.8 Cyprus -2.3 -0.5 1.4 -0.3 -0.8 0.9 16.1 16.2 15.2 Latvia 2.4 2.3 3.2 0.7 0.7 2.2 10.8 10.4 9.4 Lithuania 2.9 2.8 3.3 0.2 -0.4 1.7 10.7 9.9 9.1 Malta 3.5 3.6 3.2 0.8 1.3 1.9 5.9 5.9 5.9 Poland 3.4 3.3 3.4 0.1 -0.4 1.1 9.0 8.4 7.9 Romania 2.8 2.8 3.3 1.4 0.2 0.9 6.8 6.6 6.4 Slovakia 2.4 3.0 3.4 -0.1 -0.2 1.4 13.2 12.1 10.8 Slovenia 2.6 2.3 2.1 0.4 0.1 1.7 9.7 9.4 9.2 Hungary 3.6 2.8 2.2 0.0 0.0 2.5 7.7 6.8 6.0

Source: European Commission- European Economic Forecast, Spring 2015 f – forecast

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 16 – 2. GLOBAL ECONOMIC ENVIRONMENT

In 2015, stable growth is expected in Asian countries, restricting growth is linked to geopolitical tensions in this and the region will maintain its leading position in terms region. of growth. Despite the indicators of China's growth With reduction of investment, further growth in approaching a more sustainable rate, growth will Russia is evaluated as weak. The major banks of Russia accelerate in other countries of the region. The growth still have a limited access to capital markets of Western will be based on a decrease in prices of consumer goods countries, which makes borrowing costs significantly and oil, as well as the increasing external demand and higher. The outflow of capital will continue, economic continued favourable financial conditions. uncertainty will remain and the business environment will Due to a moderate increase of wages, favourable deteriorate in 2015. Positive growth in Russia is expected monetary policy and beneficial external demand, only in the second half of 2016, facilitated by a worldwide economic growth in Japan will be slightly above 1% increase in oil prices. in 2015. Economic recovery continued in the European Although growth in China in early 2015 was slightly Union and euro area in 2014, whereas the GDP growth slower than it was expected, the overall growth in 2015 was slower than previously expected, due to the low will reach 7%. This will mainly be the result of low oil demand as well as high levels of debt and unemployment prices, strengthening growth in the region and increasing rate. Manufacturing and investment levels also remained domestic demand. below the pre-crisis indicators. In turn, thanks to political reforms, an increase of Economic activities in the EU are still moderate. Low investment and low oil prices, growth in India in 2015 is prices of oil and supportive financial conditions still expected to be slightly faster than before, i.e. 7.6 per cent remain, although growth is weakened by the continuously Growth in CIS countries slowed down in the second low inflation. half of 2014. It was caused by a decrease in private In early 2015, EU development prospects improved consumption, fall in oil prices, international sanctions significantly. The main factors of growth in 2015 are low imposed on Russia, as well as structural shortcomings of oil prices, decrease of the euro’s exchange rate against the the Russian economy, which led to a sharp decline of the U.S. dollar, as well as monetary policy measures Russian ruble and rapidly increasing inflation. In response (quantitative easing) implemented by the ECB and their to this situation, interest rates were increased significantly downward pressure on interest rates. Risks affecting and various other measures were implemented by the growth still exist; however, their impact is expected to be Russian Central Bank to stabilise the economic situation lower than previously. in the state. These events in Russia significantly slowed Stronger growth will improve indicators of the labour the growth of other national economies in the entire CIS market in the future, which will positively influence region. private consumption. Increasing demand and lower The GDP in CIS countries will shrink in 2015; a necessity for balance corrections will promote slight increase is expected only in 2016, with exceptions investment. Structural reforms implemented so far in only in a few Central Asian states — Tajikistan, some countries within the region have given positive Uzbekistan and Turkmenistan, where relatively rapid results, however, these reforms are still not sufficient to growth will continue in 2015, as well. The main factor improve growth prospects in the medium term. Figure 2.2

Economic Growth of Partner Countries of Latvia (GDP growth rate in comparison with the corresponding period of the previous year)

6 Germany Lithuania Sweden Estonia 4 Russia

-2

-4 I II III IV I II III IV I II III IV I 2015 2016 2012 2013 2014 2015 forecasts

Source: Eurostat, the Federal State Statistics Service of the Russian Federation, forecasts of the European Commission

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 2. GLOBAL ECONOMIC ENVIRONMENT – 17 –

The growth rate in the Baltic countries remains As the external environment improves, the growth higher than the EU average, even though it has rate in Estonia will slightly increase in 2015. The main decelerated due to a slowdown in export growth. driving force of growth will be private consumption, The growth rate in Lithuania in 2014 was slightly facilitated by low inflation, increase of wages, lower slower than the year before. The Russian crisis negatively income tax rate and higher family allowances. influenced exports and the amount of investment in the Following weak economic growth in 2012–2013, the second half of the year. Private consumption continued economic situation in Germany improved in 2014. It was growing rapidly, unemployment rate fell, and wages mainly determined by private consumption and increased. Due to low oil prices, the inflation rate investment. Export growth was moderate. Following decreased, thereby accelerating an increase of disposable good growth indicators in late 2014, growth was slightly income for households. slower in the beginning of 2015, as the influence of low The growth in Lithuania will remain stable in 2015. oil prices decreased. Growth in this period was facilitated Domestic demand, especially private consumption, as by development of the manufacturing and service sectors. well as increasing employment and wages, coupled with Given a stable labour market, a favourable external low inflation, remain the driving forces of growth. environment, low euro exchange rate and favourable Investment will slow down due to the geopolitical financial conditions, growth in Germany in 2015 is uncertainty. generally expected to be slightly above the potential level. Growth in Estonia in 2014 was slightly faster than The economic growth of Sweden in 2014 was the the year before, despite the GDP falling in its main fastest in the last four years. The main driving force of trading partner country Finland, as well as in Russia. The such growth was consumption, as well as a positive largest contribution to growth was made by domestic increase in investment. trade and manufacturing sectors, whereas turnover in the In 2015, stable domestic demand will continue, and a transport and construction sectors decreased. Private positive increase in exports is expected due to economic consumption was promoted by a significant increase of growth in states within the euro area and the weaker wages, higher retirement pensions and low inflation. Swedish krona. In turn, low oil and energy prices will Volumes of investment decreased in the second half of have a limited positive effect, taking into consideration the year. Despite the weak external environment and the the low energy intensity of the Swedish economy and the import embargo imposed by Russia, exports increased. high taxes on energy products. The growth rate in Sweden will continue to increase in 2016.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 18 – 3. GROWTH

3. GROWTH

3.1 Gross Domestic Product and Aggregate Demand

3.1.1 Development Trends Figure 3.1 GDP Dynamics Since 2011, the growth of economy in Latvia has (4th quarter of 2010 = 100, seasonally adjusted data) been one of the most rapid in the EU. From 2011 until 122 2013, the annual growth of economy reached an average Latvia of 4.7%. In the first years after the crisis, the growth of Lithuania economy in Latvia was largely fostered by the increase of Estonia 116 exports volume. Since 2013, the unfavourable external EU situation has been limiting export possibilities. Private consumption grows faster, as it is fostered by a gradual increase in employment and wages. 110

In 2014, the pace of the growth of economy decreased due to external tendencies – the growth of the 104 EU being slower than expected, as well as the economic situation in Russia becoming weaker. In total, GDP increased by 2.4% in 2014, and the growth was still more 98 rapid than on average in the EU. However, despite the I II III IV I II III IV I II III IV I II III IV I 2011 2012 2013 2014 2015 rapid growth, GDP is by 5% smaller than it was before the crisis – in 2007.

In the first quarter of 2015, GDP increased by 1.9%, if compared to the first quarter of 2014; it should be treated as a good indicator, taking into account the unfavourable geopolitical situation in the region. Table 3.1

GDP by Expenditure Items (changes compared to the previous year, per cent) 2008 2009 2010 2011 2012 2013 2014

Gross domestic product -3.2 -14.2 -2.9 5.0 4.8 4.2 2.4 Private consumption -8.0 -16.2 3.1 2.9 3.0 6.2 2.3 Public consumption 2.4 -10.7 -8.1 3.1 0.4 2.9 3.4 Gross fixed capital formation -9.2 -33.3 -20.0 24.2 14.5 -5.2 1.3 Exports 2.4 -12.9 13.4 12.0 9.8 1.4 2.2 Imports -10.7 -31.7 12.4 22.0 5.4 -0.2 1.6

Since 2010, exports of the goods and services from In addition, in 2015, the dynamics of the exports of Latvia have increased rapidly, and it has been the main the goods and services has been moderate, and in the 1st driving force of the national economy. The amount of quarter, the volume of the exports increased by 3.5%, if exports in 2012 exceeded the level of exports before the compared to the 1st quarter of 2014. crisis for almost 25%. Since 2013, the dynamics of the In 2014, the domestic demand increased by 2.3%. exports have become moderate due to the low demand in Although the domestic demand in 2014 was by 18.2% foreign markets. higher than at its lowest point during the crisis in 2010, it In 2014, the volume of exports of the goods and still was behind the pre-crisis level in 2007 by 15.5%. services increased only by 2.2% – the exports of goods In 2015, the domestic demand kept growing – it increased by 4.6%, while the exports of services dropped increased by 2%, if compared to the 1st quarter of 2014. by 3.4 per cent.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 19 –

After the crisis, economic activities gradually In 2014, the imports of goods and services increased increased in the domestic market, therefore the demand by 1.6%. The increase was fostered by a drop in volumes for the imports of the goods and services increased of some groups of goods, like mineral products, rapidly. However, the dynamics of imports have become agricultural and food products, and transport vehicles. very moderate since the middle of 2012. In the 1st quarter of 2015, the imports dropped by 1.2 per cent, if compared to the 1st quarter of 2014. Table 3.2

GDP by Expenditure Items by Quarters (changes compared to the corresponding period of the previous year, per cent) 2012 2013 2014 2015 I II III IV I II III IV I II III IV I

Gross domestic product 8.8 4.3 3.7 3.4 3.1 4.6 4.6 4.5 2.8 2.3 2.4 2.1 1.9 Private consumption 3.0 4.6 2.7 1.8 5.9 8.2 8.4 2.3 2.7 2.3 2.1 2.2 2.6 Public consumption -8.8 5.5 0.2 3.7 6.2 1.2 3.7 1.5 3.7 4.2 1.7 3.8 3.4 Gross fixed capital formation 30.6 22.0 3.2 12.4 -15.6 -2.5 -2.9 -2.8 9.3 1.8 -1.7 -0.6 -0.9 Exports 12.4 5.9 10.6 10.3 3.4 2.1 -0.4 1.0 3.5 1.8 0.4 3.3 3.5 Imports 11.7 7.0 0.9 3.4 1.9 -1.8 0.2 -0.9 1.2 3.0 -0.7 2.8 -1.2

During the crisis, the Latvian imports-exports balance Private consumption kept growing in 2014, though improved significantly. Yet in 2007, the exports-imports the growth rate was more moderate than in 2013 like the balance exceeded -20% of GDP. Since 2009, the exports- overall growth of economy. Over the year, private imports balance has been improving. consumption increased by 2.3%, and the growth was In 2013 and 2014, the exports-imports balance was - fostered by the increase in average wages; however, at the 2.9% of GDP. same time, the rate of employment growth was slow. In 2015, the exports-imports balance still improves, In the 1st quarter of 2015, private consumption and in the first quarter it was -2.1% of GDP. increased by 2.6 per cent, if compared to the 1st quarter of 2014. Figure 3.2 Figure 3.3 Yearly Changes in GDP and Major Expenditure Items (2005 = 100) Changes in Private Consumption by Quarters (4th quarter of 2010 = 100, seasonally adjusted data) 170 Domestic demand 122 Exports Lithuania 150 GDP Estonia 116 Latvia EU 130 110

110 104

90 98 2006 2007 2008 2009 2010 2011 2012 2013 2014 I II III IV I II III IV I II III IV I II III IV I 2011 2012 2013 2014 2015

3.1.2 Private and Public Consumption In 2014, the expenditure of households increased in general, if compared to 2013. Expenditure for food In recent years, the growth of private and public increased by 4%, for transport – by 2% and for consumption has been fostered by a gradual increase in recreation and culture – by 5%. The expenditure for employment rate and increase in wages. In 2012, the maintenance of residential houses, in its turn, decreased private consumption grew by 3%, in 2013 – by 6.2 per by 1 per cent. cent.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 20 – 3. GROWTH

Figure 3.4 From 2011 to 2012, consumer confidence increased rapidly. However, despite the continuous improvement Dynamics of Real Wages and of the confidence, significant changes in consumers’ Private Consumption by Quarters mood are not observed, and it still is negative. th (4 quarter of 2010 = 100) Since the middle of 2012, the optimism of consumers 120 regarding the financial situation in their families has largely become stable, and it has a tendency to improve. Real wage Consumer reviews of the overall situation in the Private consumption 114 country essentially have not changed from 2013. Unemployment and inflation expectations in general diminish. The consumer unemployment expectations 108 have been decreasing since the end of 2011, except for a small increase at the end of 2014; but the inflation expectations have been highly recurring since 2011; consumers react towards different changes in the country 102 this way, for instance, to the introduction of the euro or opening of the energy market. 96 I II III IV I II III IV I II III IV I II III IV I 2011 2012 2013 2014 2015

Figure 3.5

Consumer Confidence Indicator* (response balance, seasonally adjusted data) Consumer Confidence in the Baltic States and EU Consumer evaluation for the next 12 months 10 120 Financial situation Assessment of the general economic situation Prices -5 80 Unemployment rate

-20 40

EU -35 Estonia 0 Latvia Lithuania -50 -40 I V IX I V IX I V IX I V IX I V I V IX I V XI I V XI I V XI I V 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

* The consumer confidence indicator is calculated as the average balance amount of responses to 4 questions regarding the financial situation, general economic situation, evaluation of unemployment and savings in the following 12 months.

The volumes of public consumption or public In 2014, public consumption increased by 3.4%; services decreased fast during the crisis. In 2011, public however, despite a gradual increase, the public consumption was by 13.3% lower than in 2007. The drop consumption still fell behind the level of the pre-crisis was due to the implementation of state budget period. consolidation measures. It resulted in a reduced share of In 2015, public consumption kept growing – in the public consumption in GDP. In 2008, public first quarter it increased by 3.4%, if compared to the first consumption accounted for 20% of GDP. In 2012, the quarter of 2014. volume of public consumption constituted only 17% of GDP. Although the economic situation was improving, the government commitment to keep on reducing the budget deficit limited rapid increase in expenditures also in 2012. In 2013, the volumes of public services increased by 2.9 per cent compared to 2012.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 21 –

Figure 3.6 In some EU Member States, the decrease of investments is even more dramatic, for instance in Changes in Public Consumption by Quarters Greece – by 65%, Cyprus – by 57%, Romania – by 45%, th (4 quarter of 2010 = 100, seasonally adjusted data) Ireland, Portugal, Spain – by almost 35%. At the same time, it should be noted that the volumes of investments 112 EU Estonia in Germany, Poland and Belgium in 2014 exceeded the Latvia Lithuania level of 2007 by 4.9%, 26% and 2% respectively. 108 The decrease of investments in the Baltic States during the crisis was almost four times larger than on average in the EU, and in 2010, the investments were by 104 63% lower than before the crisis. Investment activities grew along with the stabilizing economic situation, however, the volume of the investments in the Baltic States in total fell behind the pre-crisis level by 30% in 100 2014. The investments in Latvia have been rather unstable since 2008. During the years of rapid recession, they 96 I II III IV I II III IV I II III IV I II III IV I decreased almost twice. Since late 2010, positive 2011 2012 2013 2014 2015 dynamics of the investments resumed, and in 2011, the volume of investments exceeded the level of 2010 by 24.2%. The rapid increase in investments was largely 3.1.3 Investments related to the low base effect. Thus, in 2012, the pace of growth of investments was almost twice as slow (increased by 14.5%), but in 2013, the investments in the Investment activities in Latvia, like in other EU national economy of Latvia decreased by 5.2 per cent, if Member States in general, have been rather moderate in compared to 2012. recent years, and the volumes of investments still have not reached the level of the pre-crisis period. Figure 3.8 Low investment rate and weak dynamics slow down renewal and modernization of fixed assets that may Changes in Investments Volumes by Types of Assets decrease the competitiveness of the state and its growth (comparative prices, billion EUR) potential, thus affecting the productivity and the ability to 8 Intellectual property products, etc. create jobs. In 2014, the volume of investments in the EU Other machinery and equipment Member States in total has decreased by almost 12.5%, if Transport vehicles compared to 2007, and it was 19.3% of GDP, i.e., almost 6 Other buildings and structures by 2.5 percentage points lower than on average in 2004- Housing 2007. 4 Figure 3.7

Changes in Investments Volumes (4th quarter of 2010 = 100) 2

150

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 135

In the first half of 2014, the dynamics of investments were positive. In the first quarter, the investments in the 120 EU national economy of Latvia grew by 9.3%, while in the Estonia second quarter – by 2.1%. In the third and fourth Latvia quarter, the volume of investments was by 1.7% and 105 Lithuania 0.6% lower respectively than a year before. In total, the investments increased by 1.3% in 2014, and they constituted 23% of GDP. The investment process has 90 I II III IV I II III IV I II III IV I II III IV I been very moderate also in early 2015. In the first quarter 2011 2012 2013 2014 2015 of this year, the volumes of investments in the national economy of Latvia were by almost 1% lower than a year

before. It was mainly due to a decrease in the investments

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in residential houses and transport vehicles that was investments in buildings and constructions were almost partly compensated by an increase in investments in at the level of the pre-crisis period, and they constituted other machinery and equipment, as well as intellectual 48.5% of the total investments in the national economy property products. It is expected that investments in the of Latvia. national economy of Latvia will maintain a moderate In 2014, the most rapid growth was experienced by growth. The low level of investments and weak dynamics investments in residential houses and transport vehicles, are largely influenced by weak crediting, a relatively low respectively by 13.3% and 16.7%, whereas the demand, a comparatively high level of debt obligations of investments in manufacturing equipment decreased by the private and public sector, as well as uncertainty of 15.2% if compared to the previous year. In the first foreign economic and political situation. quarter of 2015, the investments in construction of The structure of the invested assets has changed since residential houses, as well as other buildings and 2007. It was mainly determined by a significant drop in constructions in total were by 6% lower than a year the investments in residential houses, as well as before, but the investments in manufacturing equipment machinery and equipment during the recession years. In increased by 4.4 per cent. 2010, the investments in residential houses decreased by The role of the state in the investment process has 70.3%, but in transport vehicles and equipment – by become more important over the past few years. The 62.4%, including transport vehicles – by 81.3%, if state provides a significant support to private investments compared to 2007. During the following two years, the through the EU structural funds co-financing under weak investments in machinery and equipment increased a crediting conditions. little; however, since 2013, less and less investment has Although during the recession the volume of the state been made in those assets, and their volumes in 2014 investments decreased, its share in the total investments were half of the volumes in 2007. The investments in in the national economy of Latvia increased, and it residential houses, in their turn, basically did not increase, reached 24% in 2010, i.e. it was by 8 percentage points and in 2014 they constituted only 35% of the pre-crisis higher than in 2007. In 2011, the state investments level. increased by 16%, constituting 4 percentage points of the The investments in other buildings and constructions total growth of the investments. However, the state were relatively consistent. In 2010, they decreased by investments in 2012 and 2013 were by 3.4% and 7.3% 37.5%, if compared to 2007. In the following three years, lower respectively than a year before. The volume of the the investments in those assets increased rather rapidly – state investments in 2014 was by 8.8% lower than a year by 42.3%, mainly owing to significant state investments before, whereas the private investments increased by 2 in infrastructure projects. In 2013, the volumes of the per cent. Table 3.3

Gross Capital Formation 2008-2010 2011 2012 2013 2014 2015 I-III average annual growth rate, per cent

Gross domestic product -6.9 5.0 4.8 4.2 2.4 1.9 Gross capital formation -25.1 42.1 2.6 -4.0 -0.1 -14.1 – gross fixed capital formation -21.5 24.2 14.5 -5.2 1.3 -0.9

% of GDP

Gross capital formation 25.8 24.3 26.0 23.8 24.2 20.4 – gross fixed capital formation 25.2 22.1 25.2 23.3 23.0 18.9 – changes in inventories 0.6 2.1 0.8 0.6 1.1 1.4

Results of enterprise manager surveys show that the followed by demand factors in the EU Member States increase in demand is the main factor promoting over the past few years. investments. Since 2013, the role of “access to finance” The capacity load level in the manufacturing has been factors in promoting investments has significantly gradually increasing since the beginning of 2010. At the increased. In 2015, the access to finance is estimated to end of the second quarter of 2015, it reached 71.3%, be a significant factor promoting investments of equal which is only by 1 percentage point lower than at the end importance to the factors of technical character, such as of 2007. Low investment activities at comparatively high development of technologies, availability of qualified capacity load level give evidence of reserved mood of workforce, etc. It should be noted that technical factors investors. An increase in demand, as well as have been mentioned as the main drivers for investments entrepreneurs’ positive future expectations may foster not only an increase in the capacity load, but also an

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increase in investments. Positive trends in the investing as information and communications services, health and process are expected to largely depend on the access to social care, mining and energy decreased rather credit resources and other external financing sources and moderately. on the wish to strengthen the positions in foreign and Positive investment dynamics have renewed in some domestic markets, including by technologically renewing sectors since the end of 2010, and in 2011, the said the existing production capacity. dynamics were very rapid. Investments in goods manufacturing sectors in 2011 were by 49.4% higher than Figure 3.9 a year before; it was largely determined by significant Factors Affecting Investments in Manufacturing* investments in the energy sector and manufacturing. Investments in the services sector, in their turn, increased 48 by 12% and constituted almost 60% of the total investments in the national economy of Latvia. 2012 2013 2014 2015 Investments dynamics in services sector in 2012 36 increased slightly more rapidly than a year before – by 19.2%. It was mainly determined by large investments in the transportation and storage sector, as well as in 24 activities related to immovable property. Investment dynamics in goods production sectors were moderate (by 6.6%); it was largely influenced by a decrease in 12 investments in the construction sector. According to provisional data, the volumes of investments in services sectors in 2013 remained at the 0 level of 2012, whereas the investments in goods Demand Finances Technical Other factors production sectors in total were by 14.7% lower than a factors year before. Slowdown of investments in the services sectors was largely influenced by a decrease in the * Business and consumer surveys of the European Commission investments in the trade and transportation and storage sectors. The decrease of the volume of investments in Structure of investments by sectors.1 Due to the goods production sectors was determined by the drop of financial crisis, the investments dropped in all sectors. investments in the manufacturing (by 31.2%) and energy Particularly large decrease in the volume of investments sector (by 21%). It was compensated in part by an was observed in the field of construction. In 2010, increase in investments in construction, as well as investments in the construction sector were by 78% wastewater, waste management and treatment. lower than in 2008. Almost as large decrease in the volume of investments was in trade and accommodation and catering service sectors. Investments in such sectors Table 3.4

Dynamics and Structure of Investments by Sectors* (per cent) growth rate structure 2012 2013 2014 2015 I-III 2012 2013 2014 2015 I-III

Agriculture and forestry 7.0 2.5 -17.9 -27.8 7.0 7.5 4.4 5.0 Manufacturing 7.6 -30.6 21.9 6.9 13.4 9.7 12.8 14.8 Construction -29.1 6.1 -10.8 3.0 3.0 3.3 2.2 2.7 Trade and accommodation 19.9 -4.6 25.2 11.2 8.5 8.5 7.1 8.9 Transport and storage 31.1 -5.5 12.7 50.0 15.7 15.6 18.4 21.8 Other commercial services 34.1 7.1 4.2 -10.5 20.7 23.3 14.5 15.9 Public services -3.9 4.3 -2.7 -5.6 16.3 17.9 26.6 19.1 Other industry 16.6 -12.0 -17.6 3.9 15.4 14.2 14.0 11.8 Total 14.5 -5.2 1.4 4.9 100 100 100 100

* 2013 – provisional data; 2014 – evaluated according to quarterly data

1 Investments by sectors are presented according to the non-financial investment statistics.

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In 2014, the investments in the sectors of the Latvian investments in the sector decreased almost three times, national economy in total remained at the level of the reaching the lowest point in 2009. It was largely previous year. However, the dynamics was rather determined by a decrease in investments in the different from sector to sector. Investment volumes in production of consumption goods (including the food services sectors increased by 5.3%, whereas the industry – by 44%), as well as in intermediate investments in goods production sectors were by 5.4% consumption goods sectors (including wood processing – lower than in 2013. The growth of the investments in by 88% and production of chemical substances and services sectors was largely determined by a significant products – by 77%). investment volume increase in information and Since 2010, the sector resumed positive dynamics. In telecommunications services – by 36.4%, and trade – by 2010, the investments in the manufacturing exceeded the 30.4%. The decrease in investment volume in goods level of the previous year by 5.5%. Investments in the production sectors was mainly related to decreased sectors of production of non-durable consumer goods investments in the energy sector and agriculture that was and investment goods were increasing most rapidly. The compensated only partly by the growth of investments in wood processing sector, paper industry and publishing, as the manufacturing. In 2014, the volumes of investments well as production of pharmaceuticals had the largest in the energy sector were by 19% lower than a year contribution to the increase in investments in the before. It can be explained by the completion of large manufacturing. investment projects in the previous year. Similar In 2011, investment activities in the manufacturing tendencies are present at the beginning of 2015. In the increased rapidly. Compared to 2010, investment first quarter of this year, the total investments in services volumes in the sector increased by 37.5%. More than a sectors were by 8.5% higher than a year before, mainly half of the investments in the manufacturing were made owing to significant investments in the transportation and in wood processing and production of metals. The storage sector. In goods production sectors, the negative investments in the manufacturing kept growing in 2012, dynamics was maintained, and in the first quarter of though slower than a year before. It was largely 2015, the investments were by 1.3% lower than in the determined by lower volumes of investments in wood first quarter of the previous year. processing and productin of metals. In total, the Investing processes in the manufacturing are uneven investments in the manufacturing in 2012 constituted with considerable fluctuations in the recent years. During 13.4% of the total volume of investments in the national the rapid recession of economy, the volumes of economy of Latvia, which is by 7.6% more than in 2011. Table 3.5

Dynamics and Structure of Investments in Manufacturing* (per cent) Growth rate Structure 2012 2013 2014 2015 I-III 2012 2013 2014 2015 I-III

Food industry 46.7 -39.6 2.5 50.0 27.9 25.1 21.1 25.3 Light industry -19.2 -7.6 41.2 20.3 1.4 1.9 2.2 2.3 Wood processing -28.2 -26.9 56.9 -19.1 23.9 26.0 33.4 23.6 Paper industry and publishing 0.3 16.4 -10.3 177.2 3.2 5.5 4.1 6.8 Chemical industry and related industries -33.6 -19.1 3.5 -10.5 7.5 9.0 7.6 8.1 Production of other non-metallic mineral products** 43.2 -18.6 20.1 -38.7 7.5 9.0 8.9 7.6 Production of metals and metal articles** -33.4 -68.7 6.7 34.7 14.2 6.6 5.8 8.1 Production of machinery and equipment 5.1 -35.8 45.3 4.6 1.5 1.5 1.8 1.5 Production of electrical and optical equipment 66.6 -30.8 54.3 14.6 3.3 3.3 4.2 4.1 Production of transport vehicles 22.1 -40.7 33.9 53.1 5.7 5.0 5.5 8.0 Other sectors of manufacturing -6.6 18.8 -6.6 -15.0 4.0 7.1 5.4 4.7

* 2013 – provisional data; 2014 – evaluated according to quarterly data ** Evaluation of the Ministry of Economics

According to the provisional data, investments in the wood processing sector in the first half of 2013, as well as manufacturing in 2013 were by 31.2% lower than a year a significant decrease in investments in the metal before. The decrease in the investment volumes, if manufacturing sector. The investment activities in other compared to the previous year, is mainly related to manufacturing sectors were also slightly weaker at the weaker investment activities in the food industry and beginning of 2013 than a year before. In the second half

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of 2013, the overall positive dynamics of investments in Figure 3.11 the sector resumed and remained in 2014. According to the provisional data, investments in the manufacturing Exports of the Latvian Goods and Services sector in 2014 were by 21.9% higher than a year before (billion EUR and per cent) and constituted almost 15% of the total volume of 16 investments in the national economy of Latvia. The Services increase in investments was mainly determined by Goods significant investments in wood processing and productin 12 27% of non-metallic mineral products. The investments in the 28% 28% above sectors constituted 42% of the total investments in 29% the manufacturing. The investments in the manufacturing kept growing at the beginning of 2015 – in the first 8 31% quarter of this year they were by almost 7% higher in the sector in general than in the corresponding period of the 72% 72% 73% previous year. Investments in the publishing and record 4 71% reproduction sector increased most rapidly – almost 69% seven times, almost twice as much as investments in the production of metal, as well as production of transport 0 vehicles, trailers and half-trailers, almost one and a half 2010 2011 2012 2013 2014 times more than investments in the food industry a year before. It should be noted that the dynamics of Source: The Bank of Latvia investments in all sectors were positive. Investor survey results show that the investment In 2014, the imports of the Latvian goods in actual structure in the manufacturing mostly remains prices increased by 0.4%, but in comparable prices – by unchanged. In 2015, investments in the manufacturing 0.8 per cent. were mainly related to the replacement of worn-out Figure 3.12 equipment and machinery and expansion of their production capacities – respectively 38.5% and 25.8% of Exports, Imports of the Latvian Goods and Trade Deficit the total investments in manufacturing. In recent years, (billion EUR and per cent) investments for rationalising the production process are 6.0 40 Trade deficit, % of the total trading turnover growing as well. At the beginning of 2015, they (right axis) constituted 21% of the total investments in the Imports of goods (right axis) manufacturing. 4.5 30 In the nearest future, investment volumes in the national economy of Latvia are likely to increase Exports of goods (left axis) gradually. However, the dynamics of the investing 3.0 20 process will largely depend on the growth of demand, access to financial resources, as well as improvement of the external situation. 1.5 10

3.1.4 Exports and Imports 0.0 0 I II III IV I II III IV I II III IV I II III IV I Exports and Imports of Goods 2011 2012 2013 2014 2015 The Latvian exports grew fast in 2010-2012, when the annual growth rate in actual prices was on average above In 2012-2013, when exports grew slightly faster than 20%. Due to decrease in the foreign demand, the growth imports, the trade deficit decreased as well. In 2013, it rate of exports of goods was considerably slower in 2013, constituted 11.5% of the foreign trade, but in 2014 – yet, it maintained positive dynamics. 11%. At the beginning of 2015, the trade deficit remained Exports in actual prices grew moderately in 2014 – by under 10%. It should be noted that in the years of rapid 2.3%, but in comparable prices – by 3.8 per cent. growth (2007-2008), the deficit constituted even more Like exports, also the imports of the Latvian goods than one fourth of all foreign trade. grew very fast from 2010 to 2012, but in 2013 the growth rate became slower – up to 1% in actual prices.

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Figure 3.12 Over the past few years, the level of diversification of the Latvian goods exports has been improving. During Breakdown of Exports Changes the years of rapid growth, several largest export product by Analysing the Constant Market Share groups, like timber and timber products, and metals, (structure of changes in Latvian exports to the dominated in the growth of exports. During the crisis, EU countries, per cent) the volumes of exports dropped in all product groups; 32 however, the largest export groups experienced the most rapid decrease in volumes, which led to an improvement Competitiveness effect of the diversification index. Yet, as the growth resumed in the post-crisis period, the volumes of exports by 24 46% External demand effect groups of goods grew at a similar pace, which is a sign of 64% a higher level of diversification. It should be noted that recently this index in Latvia has become equal to the 16 average level of the EU-15 countries. Figure 3.14 8 64% 97% Dynamics of Exports of the Latvian Goods 36% (million EUR) 69% 86% 0 1090 2010 2011 2012 2013 2014 2015 2014 2013 2012 In the post-crisis period, from 2010 to 2011, the 980 growth of the Latvian exports to the EU Member States was influenced equally by improving competitiveness of the Latvian enterprises and the steady foreign demand. 870 Yet, in 2012-2013, the deteriorating growth in the EU led to a significant drop in foreign demand, and thus the growth of exports was mainly determined by the 760 improving competitiveness. The improving competitiveness of the Latvian enterprises in the post- crisis period was mainly determined by a drop in 650 workforce costs. In 2014, the growth of exports was I II III IV V VI VII VIII IX X XI XII mainly influenced by the external demand, and the role of competitiveness in the growth of exports became less important. As export prices decreased faster than import prices (respectively by 1.4% and 0.5%), the trade conditions Figure 3.13 became slightly worse in 2014. Similar tendency remained at the beginning of 2015. Diversification of the Latvian Goods Exports In 2014, the growth of exports was still negatively (index, calculated using the CN 2 classification of symbols, lower index means higher diversification degree) influenced by the decrease of exports of metal and its products. Exports of agricultural and food products, 9 12 mineral products, as well as light industry goods slightly Export diversification degree (left axis) decreased. The growth of exports was influenced Exports, billion EUR (right axis) positively by the increase of exports of machine 8 10 manufacturing, timber and its articles. Exports of transport vehicles and chemical and light industry goods 7 8 grew more moderately. In January-April 2015, export was positively influenced by the growth of exports of mechanisms and 6 6 machinery, wood and wood products, as well as chemical industry goods. As the prices dropped considerably, the 5 4 export value of agricultural and food products decreased. Exports of transport vehicles and metals and their 7.7 7.7 6.1 5.7 6.6 6.2 5.7 5.8 6.2 products decreased as well. 4 2 2006 2007 2008 2009 2010 2011 2012 2013 2014

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Table 3.6

Exports of the Latvian Goods by the Main Commodity Groups (%, in current FOB prices) 2014 2015 I-IV changes compared to changes compared to the corresponding contribution to the structure the previous year period of the previous changes in volumes year Total 100 2.4 2.5 2.5 including: Agriculture and food products 19.3 -3.1 -18.0 -3.5 Mineral products 8.3 -2.7 0.2 0.0 Products of chemical and allied industries, plastics 10.0 4.5 10.8 1.0 Light industry products 4.7 -2.5 10.5 0.5 Wood and articles of wood 16.6 6.7 6.4 1.1 Metal and articles of metal 9.0 -11.9 -2.9 -0.3 Machinery and mechanical appliances 16.9 10.8 22.7 3.6 Transport vehicles 5.2 16.9 -15.7 -0.9 Other goods 10.0 6.8 8.4 0.9

Exports of goods to the EU Member States increased on imports of some food products introduced in Russia. by 4.7% in 2014. The growth of export groups of The growth of machinery exports had a small positive machinery and transport vehicles constituted a significant impact on the decrease of exports. part of it. Also in January-April 2015, exports to the EU Figure 3.16 Member States increased similarly – by 4.9%. During this period, exports of machinery, wood and its products, Dynamics of Latvian Goods Imports by Months light and chemical industry goods increased considerably. (million EUR)

Figure 3.15 1240 Structure of the Latvian Exports by Groups of Countries 2015 2014 (billion EUR and %) 2013 2012 1150 12 Other countries CIS Other EU Member States 1060 13% 12% 9 Lithuania and Estonia 15% EU-15 13% 15% 15% 16% 15% 10% 10% 970 6 13% 15% 29% 30% 31% 32% 880 30% I II III IV V VI VII VIII IX X XI XII 3 32% 31% 32% 35% 33% The slight growth of imports of goods in 2014 was 0 positively influenced by the increase in imports of 2010 2011 2012 2013 2014 machinery, wood and its products, as well as chemical products, while it was also influenced negatively – mainly Exports of goods to the CIS countries in 2014 by the decrease of imports of mineral products. In the decreased by 5%, but in January-April 2015 – four months of 2015, the imports of goods were considerably faster – by 19.4%. It was determined by a positively influenced by the same groups of goods as in significant decrease of exports to Russia (by 23.9%). The 2014. Imports of mineral products, agricultural and food decrease was mainly determined by a considerable fall in products, in their turn, decreased significantly in the said the value of the Russian currency, as well as the sanctions

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period. Mainly, it was due to a significant decrease in In 2014, due to a significant decrease in imports of prices of petroleum and food products. mineral products, imports from the CIS countries Imports from the EU Member States in 2014 dropped (by 3.2%). A similar tendency remained also in increased just as the overall imports, but in January-April the four months of 2015, when imports of the goods they decreased by 3.7%. from the CIS countries shrank by 10.6%. Table 3.7

Imports of the Latvian Goods by the Main Commodity Groups (%, in current CIF prices) 2014 2015 I-IV changes compared to changes compared to the corresponding contribution to the structure the previous year period of the previous changes in volumes year Total 100 0.4 -2.8 -2.8 including: Agriculture and food products 15.7 -0.3 -10.6 -1.7 Mineral products 14.5 -15.1 -21.3 -3.1 Products of chemical and allied industries, plastics 15.3 2.6 6.0 0.9 Light industry products 6.0 -1.4 -3.8 -0.2 Wood and articles of wood 2.6 33.7 15.4 0.4 Metal and articles of metal 8.3 -4.3 -5.0 -0.4 Machinery and mechanical appliances 20.1 9.6 10.9 2.1 Transport vehicles 7.7 1.0 -9.0 -0.7 Other goods 9.9 6.2 -0.1 0.0

Until 2009, the share of import of capital goods Figure 3.18 shrank along with the decrease in investments, but from 2009 to 2012, the imports of consumption goods Exports and Imports of Latvia in January-April 2015 dropped. In recent years, the structure of imports by (major partner countries*, million EUR) targets of use has not changed significantly. Lithuania 670 Figure 3.17 596 Estonia 327 Imports by Classification of the Broad Economic 401 Categories Poland 459 (billion EUR) 218 422 16 Germany Other goods Consumption goods 226 342 Intermediate goods Capital goods Russia 238 12 13% Sweden 134 13% 14% 190 13% Finland 204 24% 25% 27% 62 25% Imports 8 12% Great Britain 68 180 28% Exports Denmark 88 49% 47% 45% 151 4 50% Netherlands 152 48% 87

15% 0 140 280 420 560 700 12% 13% 145% 13% 0 2010 2011 2012 2013 2014 * Countries where the foreign trade turnover with Latvia constitutes more than 3% in the total share.

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The largest trade partners of Latvia in January-April Latvian neighbours Lithuania and Estonia 2015 were Lithuania – 17% of the total foreign trade traditionally are the largest trade partners of Latvia. As turnover, Estonia – 10%, Poland and Germany – 9% imports considerably increased during the rapid growth each, Russia – 8%, Sweden and Finland – 4% each period, an explicit deterioration of the Latvian trade andthe United Kingdom, Denmark and the Netherlands balance with both countries was observed. Yet, in the – 3 per cent each. second half of 2008, the balance with Lithuania and Estonia started improving gradually. Figure 3.19

Foreign Trade Turnover of Latvia with Lithuania and Estonia (million EUR) Lithuania Estonia

800 800 balance exports 500 imports 500

200 200

-100 -100

-400 -400 I III I III I III I III I I III I III I III I III I 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Recently, the trade balance with Estonia has remained volumes of this group of exports dropped by 5.1%. steadily above 10% of the total trade turnover, while the Exports of road and sea transport services dropped, but balance with Lithuania slightly decreased mainly due to it was slightly compensated by an increase in the exports faster imports of mineral products and agricultural and of railway transport and other transport services. The food products in 2012-2013. But in 2014, due to a volume of transport export decreased a little also in the decrease in prices of petroleum and food products, the first quarter of 2015. value of imports of the said groups rapidly dropped, and The revenues from foreign tourists grew at a stable the negative trade balance with Lithuania decreased pace both in 2014 and in January-March 2015. considerably also at the beginning of 2015. Exports of services to the EU Member States The main groups of products exported to both Baltic constitute a half of the total exports of services of Latvia. States in 2015 still are agricultural and food products, In 2014, export volumes of services to the EU Member mechanical engineering products, chemical industry States increased by 1.7%, but in the first quarter of 2015 products and mineral products. – by 7.3%. Road and sea transport and trips constitute

Exports and Imports of Services the largest share in exports of services to the EU Member The decrease in exports of services during the crisis States. was considerably lower than that of exports of goods. In Volumes of export of services to the CIS countries 2011-2012, exports of services grew similarly to the were a little above 10% of the total export of services. In exports of goods at a stable pace. The positive balance of 2013, exports of services to the CIS countries increased services in 2012 covered approximately 64% of the rapidly. However, in 2014, the total export of services negative trade balance of goods. In 2013-2014, taking decreased (by 4.6%) along with the drop in volume of into account the improvement of the trade balance of transit export services. It was partly compensated by an goods, the positive balance of services covered 70% of increase in the revenue from tourists from the CIS the negative trade balance of goods, but in the first countries. In the first quarter of 2015, like in 2014, the quarter of 2015 – 80%. total volume of exports of services to the CIS countries The revenues from transit transport still constituted has slightly dropped (by 1.9%) due to the decrease in the slightly less than a half of the exports of services. Year volume of transit export services. 2014 was not particularly successful for transit – the

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Table 3.8

Exports and Imports of Services (per cent) 2014 2015 I-III changes compared to changes compared to the corresponding structure structure the previous year period of the previous year exports imports exports imports exports imports exports imports

Services – total, 100 100 -1.4 -1.4 100 100 5.0 6.9 including: Transport services 41.5 32.5 -5.1 4.2 43.6 33.2 -2.0 8.2 – sea transport 10.4 7.0 -6.4 -1.0 12.2 6.9 1.6 -1.1 – air transport 6.3 11.1 -9.2 5.0 5.2 12.0 1.6 17.9 – rail transport 10.9 4.2 0.7 8.2 13.7 5.0 -0.3 19.2 – road transport 12.5 9.6 -8.5 5.6 11.0 8.8 -8.6 -0.6 – other transport 1.4 0.5 19.1 6.0 1.5 0.6 -5.0 3.7 Travel 18.7 25.6 10.5 -0.3 16.6 21.9 11.8 -1.9 Other services 39.8 41.9 -2.5 -6.0 39.8 44.8 10.9 10.9 – construction services 3.3 2.4 5.0 -24.9 2.3 2.2 10.6 -24.5 – insurance and financial services 10.9 8.1 8.6 -18.3 12.6 11.0 28.5 41.1 – communication services 2.4 3.4 -2.2 -2.8 2.4 4.3 3.1 33.9 – information and computer services 5.1 4.5 6.5 -7.9 6.3 4.7 20.9 12.2 – other commercial services 16.7 22.1 -12.0 2.3 14.9 20.9 -2.4 0.9 – other services 1.3 1.4 0.6 -6.8 1.2 1.6 8.9 10.0

Figure 3.20 In 2014, exports of services to Estonia slightly decreased (by 3.6%), but to Lithuania – increased (by Exports of Services by Items 19.2%). In the first quarter of 2014, exports of services to (billion EUR) both Estonia and Lithuania increased considerably (by Other services 9.7% and 21.46% respectively). The most important Financial and insurance services exported services to both neighbour countries were 4 related to tourism, transit and trade intermediation. Travel

Transportation 27% 30% 29% 3 26% 24% 27% 10% 10% 11% 11% 15% 2 12% 15% 16% 17% 19% 16% 16%

1 47% 47% 43% 45% 45% 42%

0 2009 2010 2011 2012 2013 2014

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3.2 Contribution of Sectors

3.2.1 Development Trends of Sectors fostered the growth of the domestic market oriented sectors.

After a significant drop of volumes during the crisis, From 2010 to 2012, the rate of growth in the key export owing to the improvement of the competitiveness and sector – manufacturing – was much higher than the export opportunities, the tradable sectors were the first to overall growth of the national economy, and the sector resume their growth. In the key export sector – became the main driver of the growth of the national manufacturing – the production volume in 2013 economy. In addition, the growth of other tradable exceeded the level of 2009 by 24%. The growth of the sectors, for instance, agriculture, forestry, transportation tradable sectors and increase of the income from exports and storage, resumed faster than in other sectors of the national economy in the post-crisis period. Figure 3.21

Changes in Value Added (per cent) 2012 compare to 2009 2014 compare to2012

Manufacturing

Transport and storage

Other commercial services

Trade and accommodation Growth of GDP Agriculture and forestry over the period – 6.7% Public services Growth of GDP over the period – Construction 6.9% Other industry

-16 -6 4 14 24 -16 -6 4 14 24

In recent years, the contribution of the domestic In comparison to 2008, the share of manufacturing market oriented sectors – trade, construction and and commercial services has increased significantly, but commercial services – has become larger. the share of the construction sector and public services in the overall added value has decreased. Table 3.9

Dynamics of GDP (in %, compared to the previous year) 2009 2010 2011 2012 2013 2014

Agriculture and forestry 12.7 -3.9 -1.8 7.5 -0.1 1.5 Manufacturing -22.4 14.0 4.0 4.6 0.0 -0.3 Other industry 6.8 -1.7 -5.2 -5.5 -3.3 -2.5 Construction -38.0 -35.4 27.1 14.5 7.5 8.1 Trade and accommodation -16.5 -1.9 4.1 1.7 4.8 2.3 Transport and storage -23.3 -5.5 18.5 6.9 1.6 3.2 Other commercial services -6.8 -4.1 6.2 5.2 6.0 1.3 Public services -9.9 -6.9 3.1 0.1 3.8 3.3 Gross domestic product -14.2 -2.9 5.0 4.8 4.2 2.4

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Improvement of the situation in the labour market – turnover of retail trade increases, and a stable growth is increase in the employment rate and increase in wages – observed in the sectors of commercial services. fosters the increase in private consumption that, in its Narrowing of export possibilities since 2013 has had a turn, has a positive impact on the growth of the service negative impact on the growth of tradable sectors. sectors oriented towards the domestic market. The Table 3.10

Structure of the Economy (by value added, per cent) 2000 2005 2009 2011 2012 2013 2014

Agriculture and forestry 5.2 4.3 3.7 3.9 3.7 3.6 3.4 Manufacturing 15.7 13.2 10.9 13.1 12.9 12.6 12.2 Other industry 4.3 3.2 5.2 5.0 4.7 4.4 4.2 Construction 6.4 6.4 7.4 5.4 6.1 6.4 6.7 Trade and accommodation 15.2 17.8 16.4 16.3 15.7 15.8 15.7 Transport and storage 11.8 12.3 10.3 10.2 10.3 9.7 9.6 Other commercial services 24.0 27.5 29.0 30.4 31.3 32.7 33.2 Public services 17.4 15.2 17.2 15.6 15.2 14.8 15.1 Total 100 100 100 100 100 100 100

The economic crisis, the growth of the tradable (construction, trade and services sectors) became larger, if sectors in post-crisis period, as well as the growth of the compared to 2012. In 2014, the share of those sectors domestic market oriented sectors in recent years had an exceeded 70%. It should be noted that, since 2000, the impact on the structure of the national economy. In share of the commercial sectors in the national economy 2012, the share of the manufacturing in the national has gradually increased. Its growth within 15 years is economy increased rapidly, if compared to 2009. In 2014, almost 10 percentage points. the share of the domestic market-oriented sectors Table 3.11

GDP by Quarters (changes compared to the corresponding period of the previous year, %) 2013 2014 2015 I II III IV I II III IV I

Agriculture and forestry 1.2 -1.7 -2.0 4.3 9.1 4.3 -5.6 2.4 -8.6 Manufacturing -4.8 -0.6 2.5 2.6 1.2 0.1 -0.6 -1.7 4.4 Other industry -1.4 1.4 -4.1 -8.3 -7.4 -5.4 0.5 3.4 -4.1 Construction 9.8 5.3 11.6 3.9 24.6 15.8 0.6 4.4 -0.1 Trade and accommodation 6.2 5.8 5.2 2.2 2.6 2.2 2.4 2.1 1.1 Transport and storage 2.0 0.5 0.8 3.3 5.1 2.2 2.3 3.2 -1.6 Other commercial services 4.1 6.1 7.2 6.5 1.9 -0.1 2.9 0.7 2.1 Public services 1.3 5.0 2.7 5.1 3.3 3.4 3.2 3.4 3.5 GDP 3.1 4.6 4.6 4.5 2.8 2.3 2.4 2.1 1.9

In the agriculture and forestry sector, following an 6% higher than a year before. However, in the second insignificant drop in the production volume in 2013, a half of 2014, the agriculture sector was significantly moderate growth (by 1.5%) was observed in 2014. The influenced by the ban of imports of food products volume of plant-growing produce increased by 0.4%, the imposed by Russia. In the 2nd half of 2014, the volume of cattle breeding – by 4.8%. In 2014, the volume production volume in the sector was by 2.6% lower than of wood cut increased a little. a year before. In the agriculture and forestry sector, year 2014 In the 1st quarter of 2015, the production volume in started positively – in the first six months of the year, the the agriculture and forestry sector was by 8.9% lower production volume in the sector in total was by almost than a year before. The drop in the production volumes

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was mainly due the situation in the forestry sector. manufacturing – some of the sectors still demonstrated a Comparatively warm weather at the beginning of the year steady growth, while others experienced a drop in the limited the possibilities to take out timber from felling production volumes due to different factors. areas. Low timber prices in Russia at the same time Production volumes in other industry sectors fostered significant increase in imports – in the 1st (mining and quarries, electricity, gas supply, heat supply, quarter of 2015, the imports of timber from Russia water supply, wastewater and waste management and increased by more than 40 per cent. treatment) decreased in 2014 by 2.5%. It was largely Like in 2013, low demand in the export markets related to the weather; therefore lower volumes of continued to slow down the growth of the electricity and heat energy were produced. The manufacturing also in 2014. In 2014, the production production volumes in the sector decreased also at the volume was by 0.3% lower than a year before. beginning of 2015 – in the 1st quarter they were by 4.1% In the 1st quarter of 2015, the production volume in lower than a year before. the sector was by 4.4% higher than a year before. The The development of the construction sector is manufacturing was positively influenced by the resumed largely related to public contracts and the EU funds activity of KVV Liepājas metalurgs, as well as the stable projects. After a rapid growth of the construction growth in one of the largest sub-sectors of the volumes in the first half of 2014, the growth of the sector manufacturing – wood processing. The previously slowed down at the end of the year. In total, the growth observed trends continued in other sub-sectors of the of the construction sector reached 8.1% in 2014. Figure 3.22

Construction Volumes (2014, %) (seasonally adjusted data, the 4th quarter of 2010 = 100)

200 Construction output Residential buildings Other 14% Production of building 18% 170 construction Engineering production Administrative, Pipelines, public buildings communication 21% 140 lines, cables 11% Commercial 110 Ports and dams buildings 3% 3%

Roads, streets, Industrial buildings, 80 bridges warehouses I II III IV I II III IV I II III IV I II III IV I 23% 2011 2012 2013 2014 2015 7%

The growth rate of the construction sector in 2014 decrease was observed in the construction of ports and was similar to 2013, when the production volume of the dams, as well as bridges and tunnels, while the sector increased by 6.9%. At the same time, the growth construction volumes of complex industrial buildings of the sector in 2013 was mainly fostered by the increase increased. in construction volumes of engineering structures, but in In the 1st quarter of 2015, the construction volumes 2014, the construction volumes of non-residential were at the level of the 1st quarter of 2014 (decrease by buildings contributed most to the growth of the sector 0.1%, in comparable prices, unadjusted data). It was (increase by 34.6%). largely influenced by the base effect – the growth of the In 2014, the construction volumes of residential and construction sector in the 1st quarter of the previous year non-residential buildings had an equally rapid growth (by was almost 25 per cent. 31.1% and 34.6% respectively). In the category of non- At the beginning of 2015, the volume of the residential buildings, construction of hotels and similar construction of buildings increased more rapidly (by 6%). buildings had the most rapid growth of the construction Even more rapid increase was observed in the volumes. In 2014, a moderate growth of construction construction of residential houses. It was mainly volumes was observed in construction of industrial determined by the growth of construction of three- and buildings and warehouses. In the category of residential more apartment buildings. The most rapid drop was houses, the construction volume of double-apartment experienced by the construction volume of double- houses increased most rapidly. apartment houses. The construction of residential houses The construction volume of engineering ensured the largest contribution to the growth of the constructions dropped by 10% in 2014. The most rapid construction volumes, while there was a slight drop in the

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construction of non-residential houses. In this category, by 3.2%. The growth of the transport and storage is the most rapid increase was experienced by the largely fostered by the successful operation of ports. In construction of sports buildings. A rapid increase was 2014, the volumes of cargo loaded and unloaded at ports also observed in the construction volumes of industrial were by 5.2% higher than a year before. During the same and warehouse buildings that experienced a rapid drop in period of time, the volumes of the freights transported by 2014. railway increased by 2.2%. In 2014, the volumes of A significant decrease of the construction volumes at freight transported by road increased as well. the beginning of 2015 was observed in the category of Year 2015 did not start so successfully for the engineering structures that mainly determined the total transport sector. The services provided in the transport decrease of the growth of the construction volumes at sector in the 1st quarter of 2015 dropped by 1.6%, if the beginning of the year. The most rapid decrease in this compared to the corresponding period of the previous sector was experienced by the construction volume of year. The decrease was largely due to the drop in the ports and dams, but the construction of roads increased freight turnover in railway transport and cargos at ports. most rapidly. In the four months of 2015, the volumes of cargo In 2014, the production volumes of the services turnover at ports and freight in railway were lower by provided in the transport and storage sector increased 3.9% and 32% respectively than a year before. Figure 3.23

Freight Traffic (by months, million tons) Freight traffic by railway Cargo loaded and unloaded at ports Freight traffic by road transport 6.4 7.4 19 2012 2013 5.7 6.7 2014 2015 16

5.0 6.0

13 4.3 5.3

3.6 4.6 10 I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I-III IV-VI VII-IX X-XII

The volumes of services provided in the trade sector when fuel retail prices decreased due to the drop in global are still increasing. The growth of the trade sector oil prices. In total, the fuel retail trade volumes increased (including accommodation and catering services) reached by 5.8 per cent in 2014. 2.3% in 2014. At the beginning of 2015, the increase of A rapid growth in retail trade was also observed in the the volumes of the provided services was more moderate first months of 2015. In January-April, total retail – they increased by 1.1% in the 1st quarter. The trade turnover was by 6.6% higher than a year before. During sector is positively influenced by the increase of private the said period of time, the retail trade volumes in the consumption and retail turnover. Weak foreign trade non-food products group increased by 6.8%. Retail trade activities, in their turn, slow down the growth of the of household electric equipment increased more rapidly. wholesale sector. Retail trade via mail or online also contributed a lot to the growth. In 2014, the retail turnover increased by 3.6%. The The growth of car fuel retail trade is still being turnover of non-food retail trade increased by 2.8% fostered by comparatively low fuel prices. In the 4 during the said period of time. The increase in retail trade months of 2015, the volume of car fuel retail trade was of clothing and footwear, household electrical goods, as by 14.1% higher than a year before. It ensured almost well as retail trade via mail and online contributed the one third of the total growth of the retail trade turnover. most to the growth. Turnover of food retail trade in the four months of Trade of food products constitutes more than one 2015 grew more moderately – by 3.3%, if compared to third of the total retail trade turnover, and it increased by the corresponding period of the previous year. 3.4% in 2014. Fuel retail trade, in its turn, increased in 2014 after a drop in 2013, especially at the end of the year

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Figure 3.24

Main Indicators Characterising the Trade Sector Wholesale Trade Turnover Retail Trade Turnover (actual prices, seasonally adjusted data, (seasonally unadjusted data, 2010 = 100) the 4th quarter of 2010 = 100)

140 160

125 140

110 120

Wholesale trade turnover 2012 2013 100 95 Foreign trade turnover 2014 2015

80 80 I III I III I III I III I I II III IV V VI VII VIII IX X XI XII 2011 2012 2013 2014 2015

Development trends of wholesale are largely growth in financial and insurance activities reached 4.7% influenced by the activities of foreign trade. As the in 2014. A moderate growth was observed in the growth rate of exports and imports slowed down, the information and communication services sector. dynamics of the turnover of wholesale companies were At the beginning of 2015, the volume of the provided moderate. In 2014, the turnover of wholesale trade in services in the sector grew more rapidly – by 2.1% in the actual prices was by 2.1% lower than in 2013. In the 1st first quarter, if compared to the first quarter of 2014. The quarter of 2015, the wholesale trade turnover in actual increase was mainly determined by a more rapid growth prices was by 6% higher than a year before. in financial and insurance activities. However, the volumes of the services provided in the information and Figure 3.25 communication sector decreased a little over the year. Development Trends of Commercial Services As the expenditure of the government grew, the (seasonally adjusted data, the 4th quarter of 2010 = 100) volumes of the services provided in the public services sectors increased – by 3.3% in 2014. In 2015, the volume 170 Information and communication services of the services provided within the sector keeps growing, Financial and insurance activities and they were by 3.5% higher in the first quarter, if Real estate activities compared to the corresponding period in 2014. Other commercial services Arts, entertainment and recreation 140 3.2.2 Manufacturing

During the crisis, when the costs dropped, the competitiveness of the Latvian producers improved. It facilitated the development of manufacturing. From 2010 110 until the end of 2012, production volumes of manufacturing increased rapidly. The low demand in export markets in 2013 slowed down the growth of manufacturing. In 2013, the production volume of manufacturing was only by 0.1% 80 I II III IV I II III IV I II III IV I II III IV I higher than a year before. Apart from the low demand in 2011 2012 2013 2014 2015 foreign markets, the output of manufacturing was significantly affected also by the termination of JSC The growth of the commercial services sectors in “Liepājas metalurgs” activities. 2014 was more moderate than a year before. In 2014, the In 2014, the production volume of the manufacturing volumes of commercial services sectors increased by was by 0.3% lower than a year before. The growth of the 1.3%. The increase was mainly fostered by the growth in sector was still affected by the trends in foreign markets – the field of art, entertainment and recreation where the the economic growth in the EU was slower than volume of services provided rose by 6.2% in 2014. The expected, also the economic situation in Russia was weak.

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Still, the development trends in the sub-sectors of the The production volumes of one of the largest manufacturing differed a lot. manufacturing sectors – wood processing – grew at a stable pace in 2014, and the output of the sector was by Figure 3.26 6.9% higher than a year before. The volumes of exports Manufacturing Production Volumes and domestic demand for the production of the sector (seasonally adjusted data, December 2011 = 100) increased at a stable pace. The production of electrical and optical devices 120 experienced the most rapid increase in the production volume in 2014. Moderate growth in 2014 was observed in the production of non-metallic mineral products, as 110 well as the production of machinery and equipment. In 2014, the volume of produced goods in food and beverages sector was by 0.1% higher than a year before. 100 Following a successful beginning of the year, the food imports embargo imposed by Russia affected the food EU industry during the last months of the year. The decrease 90 Estonia in production volumes in 2014 was observed in the light Latvia industry sector, metalworking sector (due to the outage Lithuania of JSC “Liepājas metalurgs”), chemical industry and 80 production of transport vehicles. I IV VII X I IV VII X I IV VII X I IV 2012 2013 2014 2015

Table 3.12

Structure of Manufacturing in 2014 (per cent) by the number of posts share of exports in the by output occupied sales of the sector

Manufacturing– total 100 100 61.6 Food and beverage industry 25.5 21.7 35.5 Light industry 4.1 10.6 86.0 Wood processing 25.7 20.3 72.8 Paper industry and publishing 4.5 4.0 59.8 Chemical industry and related industries 7.6 6.7 76.5 Production of other non-metallic mineral products 6.6 4.5 46.7 Production of metals and metal articles 9.1 10.0 59.3 Production of electrical and optical equipment 6.0 3.9 90.3 Production of machinery and equipment 2.2 3.0 81.1 Production of transport vehicles 3.4 3.3 86.7 Other sectors of the manufacturing 5.3 11.9 56.9

In 2014, the total turnover of manufacturing sector In the 4 months of 2015, the output volume of the shrank by 1.4%. The turnover of production sold in the manufacturing increased rapidly, and it was by 6.3% domestic market decreased by 1.2%, but the turnover of higher than a year before. Individual sub-sectors are still the exported production – by 1.5%. The total turnover of growing steadily, but the production volume of other the manufacturing was positively affected by the rapid sectors decreases due to several factors. growth of turnover in wood processing (by 9.7%). In The production volumes in the wood processing 2014, a slight general increase of the turnover was keeps growing also in 2015. In the 4 months of 2015, the observed in the food and beverage industry, as well as the volume of goods produced was by 8.2% higher than a production of non-metallic minerals. The decrease of year before. turnover in metal processing related to the termination of activity of JSC “Liepājas Metalurgs”, in its turn, contributed most to the total drop of turnover.

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The metalworking sector contributed significantly to EU and Russia also has a significant impact on the the growth of the manufacturing in general at the development of the sector. beginning of 2015, as one of the largest industrial Like in 2014, the fastest growth of production companies “KVV Liepājas Metalurgs” resumed its volumes at the beginning of 2015 was in the production operation. of computers, electrical and optical equipment. In the food sector, the output in 2015 was by 5.1% The production volume in light industry, production lower than a year before. The relationship between the of non-metallic mineral products, paper industry and publishing, as well as chemical industry decreased. Table 3.13

Changes of the Production Volume in Manufacturing (%, compared to the corresponding period of the previous year) 2010 2011 2012 2013 2014 2015 I-IV

Manufacturing– total 16.5 11.7 9.3 0.1 -0.3 6.3 Food and beverage industry -0.1 -0.2 2.5 6.0 0.1 -5.1 Light industry 19.4 19.4 3.0 1.4 -13.6 -18.7 Wood processing 33.0 12.6 5.4 2.7 6.9 8.2 Paper industry and publishing 19.8 -0.5 10.1 5.6 -0.6 -2.5 Chemical industry and related industries 5.2 4.4 8.3 -8.7 -3.6 -0.2 Production of other non-metallic minerals 17.6 24.2 8.6 4.6 1.2 -7.1 Production of metals and metal articles 24.2 28.3 16.3 -17.6 -10.5 -* Production of electrical and optical equipment 33.2 29.6 19.9 18.4 32.3 23.4 Production of machinery and equipment 17.8 37.1 8.7 1.4 2.4 3.4 Production of transport vehicles 59.0 37.0 15.8 3.0 -15.2 2.4 Other sectors of the manufacturing -4.9 9.5 26.1 -7.6 -12.0 0.7

* – confidential data

In the 4 months of 2015, the turnover of constituted 11% of the total exports of manufacturing manufacturing was by 0.4% higher than a year before. production that was by 6 percentage points lower than in During the said period, the turnover of production sold 2014. in the domestic market decreased by 6.8%, but the During the post-crisis years, the manufacturing turnover of the exported production – increased by 4.7%. significantly contributed to creation of new jobs in the Like in 2014, in the first months of 2015, the wood national economy – in 2011 and 2012, the sector ensured processing sector contributed most to the total turnover almost one fifth of all new jobs. The growth of of the manufacturing. The turnover in this sector from employment rate in the manufacturing was considerably January to April was by 10.4% higher than a year before. slower than the increase in the output, which shows an Likewise, the turnover in the said period increased in the increase in productivity. production of electrical and optical equipment (by 24.2%) After the growth of the sector slowed down in 2013 and production of machinery and equipment (by 5.7%). and 2014, the demand for workforce dropped. In 2014, The largest negative impact was experienced by the food the number of occupied posts in the manufacturing was industry, where the turnover in the four months of 2015 by 2.5% lower than a year before. Decrease of the was by 7.5% lower than a year before. In the said period, number of jobs in metalworking, light industry and the turnover decreased also in light industry, chemical production of food and beverages contributed most to it. industry, paper industry and publishing, production of At the same time, the increase in the number of occupied non-metallic minerals, as well as production of transport posts in 2014 was observed in wood processing, chemical vehicles. industry, production of electrical and optical equipment, In the four months of 2015, 65.3% of all production as well as in production of non-metallic minerals. of the manufacturing was exported. Like in 2014, more Since the middle of 2012, the load of production than a third of all exported production was sold in the capacity in the manufacturing remained at the level of 71- markets of EU-15. Almost 30% of all exported 72%. In the 2nd quarter of 2015, the load of production production was sold in Lithuania and Estonia. In capacity was 72.2% that was very close to the historically comparison to 2014, the share of third countries in the highest level in 2005. export structure of the production of manufacturing has increased. Exports to the CIS in the four months of 2015

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The indicator of the Latvian producer confidence worse. At the end of May 2015, the confidence indicator after certain stability in 2011-2013 has been worsening of manufacturing companies in relation to their future since March 2014. It is largely related to the events in prospects was slightly worse than a year before. Ukraine and the economic situation in Russia becoming Figure 3.27

Indicators Characterising Manufacturing

Changes in production volumes and Share of the sector in the national economy Production volume index occupied posts 2014, % 2010 = 100 4th quarter of 2010 = 100 143 120 12.2%

128 112

104 Production volumes 113 2015 (seasonally adjusted data) 2014 2013 Occupied posts 2012 96 98 I III I III I III I III I 2011 2012 2013 2014 2015 I II III IV V VI VIIVIII IX X XI XII Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 20 120 Due to prices Other countries 14% Due to volumes CIS Total 115 10 12% EU-15 35% 110 Other EU 0 Member 105 On the domestic States market 10% Exports -10 100 Estonia I IV VII X I IV VII X I IV VII X I IV Lithuania I IV VII X I IV VII X I IV VII X I IV 13% 2012 2013 2014 2015 16% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data 105 0 75

-4 103 70

-8

101 65 Total Latvia On the domestic market -12 EU Exports 99 -16 60 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

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The food and beverage industry constitutes more The decrease of producer prices along with weaker than one fourth of the total output of the manufacturing production volumes have affected the turnover of the sector, and it is the largest sector in terms of the number sector. In 2014, the turnover was by 0.3% higher than a of jobs in the sector. year before. At the same time, the sales of the exported The sector sells more than one third of its production goods decreased by 1.5%. In January-April 2015, the in the export markets – mainly in the CIS, as well as in turnover was by 7.5% lower than a year before, while the Lithuania and Estonia. Thus, the economic problems in turnover of exported production fell by almost 13%. the CIS, as well as the ban of food imports imposed by The decrease of the production volumes influenced Russia have affected the growth of the sector. the employment rate – in 2014, the number of occupied Yet, at the beginning of 2014, the sector posts dropped by 2.4%, but in the first quarter of 2015, it demonstrated a stable growth; however, since August it was by 5.2% lower than a year before. had been affected by events in foreign markets. In In recent months, some positive trends have been general, in 2014, the food and beverage sector's output observed as well – the evaluation of the prospects of was only by 0.1% higher than a year before. In the four sector's companies has slightly improved, as well as the months of 2015, the production volume was by 5.1% load of the production capacity has increased in the lower than a year before. second quarter of 2015. Figure 3.28

Indicators Characterising Food and Beverage Industry Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100

123 120 Production volumes (seasonally adjusted data) 25.5% Occupied posts 110 112

2015 104 97 2014 2013 2012 96 84 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 24 Due to prices 143 On the domestic Other countries EU-15 Due to volumes market 9% 20% Total Exports 12 127 CIS 26% 111 Estonia 0 Other 14% EU 95 Member -12 I IV VII X I IV VII X I IV VII X I IV Lithuania States I IV VII X I IV VII X I IV VII X I IV 2012 2013 2014 2015 21% 2012 2013 2014 2015 10% Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data 110 0 70

-4 105 67 -8 100 Food industry 64 Total -12 On the domestic market Manufacturing Exports 95 -16 61 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

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The light industry sector basically is oriented The turnover of the industry dropped by 6.7%. The sales towards foreign markets. About 90% of all production is volume of the exported production decreased by 5%, exported – mainly to the EU Member States, therefore whereas the revenue from the production sold in the the growth of the sector is closely linked to changes in domestic market - by almost 16%. The turnover of the demand and competitiveness in the foreign markets. industry decreased further in 2015 – in January-April it The weak economic situation in the largest market – was by 10.2% lower than a year before. In this period of the EU – has affected the growth of the sector in recent time, the volume of the exported production decreased years. In 2014, the production volumes in light industry by 8.7%, while the volume of the production sold in the decreased by 13.6%. At the beginning of 2015, despite domestic market - by 19%. the gradual growth of the demand in the EU market, the In the post-crisis years, the growth of the sector has production volumes in light industry kept decreasing. In been mainly ensured by the increase of production, but in January-April 2015, they were by 18.7% lower than a year recent years, when the production volumesare decreasing, before. The production volumes decreased both in the number of jobs also decreases. In 2014, the number clothing and textile production. of occupied posts in the sector decreased by 7.1%, but in In 2014, the dynamics of the turnover of the industry the first quarter of 2015, the number of jobs decreased by were influenced by the increase in the producer prices. 12.5% over the year. Figure 3.29

Indicators Characterising Light Industry Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 140 120 4.1%

120 108

Production volumes 96 100 2015 (seasonally adjusted 2014 data) 2013 Occupied posts 2012 84 80 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 30 120 Other countries CIS 7% EU-15 12 108 7% 33% Other EU 96 On the domestic market -6 Member Due to prices Exports States Due to volumes 84 15% -24 Total I IV VII X I IV VII X I IV VII X I IV Lithuania Estonia I IV VII X I IV VII X I IV VII X I IV 2012 2013 2014 2015 10% 28% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate% December 2011 = 100 response balance, seasonally adjusted data 111 2 80 Total On the domestic market 75 106 Exports -6 70 101 -14 Light industry 65 Manufacturing 96 -22 60 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

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Wood processing is one of the largest In 2014, the turnover in the wood processing sector manufacturing sectors. The sector exports ¾ of all increased by 9.7%. Sales volumes both in the domestic produced goods, and the largest export market is EU-15 market and export increased at a similar pace. In January- Member States. April 2015, the turnover was by 10.4% higher than a year Wood processing was one of the first sectors that before. The turnover of the export production increased resumed growth after the crisis. In 2012, the production by 14.2% in the said period. In the four months of 2015, volumes in the sector exceeded the level of 2007 by more the sales volumes in the domestic market essentially than 40% already. At the end of 2012 and in the first half remained at the level of the corresponding period of the of 2013, the weak demand in the largest trade partner previous year. states slowed down the growth of the sector. In comparison to the increase in the production Since the end of 2013, a steady growth has been volumes, the number of jobs in the sector increased more observed in the sector. In 2014, the production volumes moderately. It gives evidence of the increase in were by 6.9% higher than a year before, but in the four productivity. In 2014, the number of occupied posts months of 2015, the production volume was by 8.2% increased by 1.8%. In the 1st quarter of 2015, the number higher than a year before. of jobs was even a bit smaller than a year before. Figure 3.30

Indicators Characterising Wood Processing Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 165 146 Production volumes 25.7% (seasonally adjusted volumes) 140 132 Occupied posts

118 115 2015 2014 2013 2012 104 90 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 30 136 Due to prices CIS Other countries On the domestic market Due to volumes 1% 16% Total 124 Exports 15 Other EU EU-15 112 Member 0 States 64% 5% 100 -15 I IV VII X I IV VII X I IV VII X I IV Lithuania Estonia I IV VII X I IV VII X I IV VII X I IV 2012 2013 2014 2015 5% 9% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

116 Total 8 85 On the domestic market 110 Exports 0 80

104 -8 75 Woodworking Manufacturing 98 -16 70 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

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The improved competitiveness and weak domestic From 2010 to 2013, the turnover of the sector grew demand during the crisis was the reason for paper steadily, but since 2014, the turnover of the sector has production and publishing industry sector to been decreasing. The decrease is mainly influenced by a reorientate their market focus to foreign markets. In drop in the turnover of production sold in the domestic recent years, the export possibilities were the basis for the market. growth of the sector. Currently, more than 60% of the In 2014, the turnover of the sector dropped by 1.5%, production is sold in exports. but in January-April 2015 it was by 2.5% lower than in In 2012, the production volumes in the sector the corresponding period of the previous year. In the reached the pre-crisis level, and a steady growth four months of 2015, the turnover of the exported continued in 2013. In 2014, production volumes dropped production shrank by 1.1%, while the turnover of the by 0.6%. The decrease was mainly influenced by a drop production sold in the domestic market – by 4.5%. in production volumes in paper production sector (by In 2014, the number of occupied posts in the sector 4.7%), while in publishing sector the production volumes increased at a moderate pace – by 0.5%, but in the first increased by 2.1%. In the four months of 2015, the quarter of 2015, the number of occupied posts was by production volume in paper industry and publishing was 2.4% lower than a year before. by 2.5% lower than a year before. Figure 3.31

Indicators Characterising Paper Production and Publishing Industry Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 138 118 4.5% 2015 2014 2013 2012

122 106 Production volumes 94 (seasonally adjusted 106 data) Occupied posts 82 90 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year

Due to prices 136 On the domestic market 36 Other countries Due to volumes Exports CIS 11% Total 124 16% EU-15 20 33% Other EU 112 Member 4 States 5% 100 -12 I IV VII X I IV VII X I IV VII X I IV I IV VII X I IV VII X I IV VII X I IV Lithuania Estonia 2012 2013 2014 2015 21% 2012 2013 2014 2015 14% Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data 114 6 81

106 -4 74

98 -14 67 Total Paper manufacture and On the domestic market publishing Exports 90 -24 Manufacturing 60 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 43 –

The chemical industry and related sectors constitute chemical industry in general remained at the level of the about 8% of the total output of the manufacturing and corresponding period of the previous year. ensures more than 6% of jobs. Approximately ¾ of the A smaller output influences the turnover in the production of the chemical industry is being exported, sector. In 2014, the turnover in the sector decreased by thus the growth of the sector is closely related to the 1.5%. Owing to the increase in producer prices in tendencies in foreign markets. exports, the turnover of the production sold in 2014 Since 2014, the sector has been negatively influenced remained at the level of the previous year. by the deterioration of the economic situation in Russia In the 4 months of 2015, the turnover of the sector that is one of the significant markets for the sector. The was by 2% lower than a year ago. During the period, the demand in the EU markets is also still weak. In 2014, revenue from the production sold in the domestic market production volumes in the sector dropped by 3.6%. The increased by 8.1%, while the turnover of the exported decrease in production volumes was mainly influenced by production was by 4.6% lower than a year before. the drop in the pharmaceuticals sector. A moderate Despite the difficulties, the number of occupied posts growth remains in the production of chemicals and in the sector continued growing – in 2014, it increased by chemical products and production of rubber products. In 2.9%, but in the first quarter of 2014 – by 2.6%, if the four months of 2015, the production volumes in compared to the first quarter of the previous year. Figure 3.32

Indicators Characterising Chemical Industry Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 150 130 Production volumes 2015 2014 7.6% (seasonally adjusted data) 2013 2012 120 Occupied posts 125 110

100 100

90 75 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 50 130 Due to prices On the domestic market Other countries Due to volumes EU-15 Exports 9% 20% 30 Total 120 CIS 10 25% 110 Estonia -10 Other EU 17% 100 Member -30 I IV VII X I IV VII X I IV VII X I IV I IV VII X I IV VII X I IV VII X I IV States Lithuania 2012 2013 2014 2015 22% 2012 2013 2014 2015 7% Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

110 10 Chemical industry 75 Manufacturing 104 0 70

98 Total -10 65 On the domestic market Exports 92 -20 60 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 44 – 3. GROWTH

The production of other non-metallic minerals is level of the previous year. At the same time, the turnover closely related to the growth of construction. Recovery of of the exported production increased by 6.8%, whereas it the sector from the crisis is facilitated also by the ability shrank by 4.6% in the domestic market. Similar to focus on foreign markets – mainly the old Member tendencies can be observed also in 2015. In January- States of the EU. Currently, the sector exports on average April, the total turnover was by 1.5% lower than a year half of all production. For comparison, in 2007, the share before. It was due to a drop in the turnover of the of the exported production was only 18 per cent. production sold in the domestic market by more than In 2014, the production volumes of the sector 6 per cent. increased by 1.2%. In the four months of 2015, they were In 2014, the number of occupied posts in the sector by 7.1% lower than a year before. The development of increased by 4.5%, but in the first quarter of 2015, the the sector is influenced by the deceleration of the growth number of jobs remained at the level of the of construction in the domestic market. corresponding period of the previous year. As moderate dynamics of producer prices remained, the turnover in 2014 essentially was maintained at the Figure 3.33

Indicators Characterising Production of Other Non-metallic Minerals

Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100

200 154 Production volumes 6.6% (seasonally adjusted data) Occupied posts 160 136

2015 118 120 2014 2013 2012 100 80 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 70 136 Due to prices On the domestic market Other countries CIS Due to volumes 12% Exports 7% Total 124 40 Other EU Member EU-15 10 112 States 50% 10% 100 -20 I IV VII X I IV VII X I IV VII X I IV Lithuania I IV VII X I IV VII X I IV VII X I IV 2012 2013 2014 2015 12% Estonia 2012 2013 2014 2015 9% Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

116 Total 10 Non-metallic mineral production 65 On the domestic market Manufacturing Exports 60 110 0 55 104 -10 50

98 -20 45 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 45 –

Production of metal and metal articles had a as of March 2015. It influences positively not only the significant contribution to the growth of the growth indicators of metalworking, but also the manufacturing in general in the post-crisis years. In 2012, manufacturing as a whole. the output was by almost 40% higher than before the Along with the drop in output in 2014, the turnover crisis, and most of the production was being exported. of the sector decreased (by 18%). In the four months of In 2013, the sector was significantly influenced by the 2015, the total turnover of the sector fell behind the level termination of the activity of one of the largest of the previous year. It was largely due to weak indicators manufacturing enterprises – JSC “Liepājas Metalurgs”. in January-February. Metal production volumes shrank twice in 2013. The At the end of 2013, when the activity of JSC outage of JSC “Liepājas Metalurgs” significantly “Liepājas Metalurgs” was terminated, about 1/10 of the influenced the total growth indicators of the employees working in the sector were fired. In 2014, the manufacturing also in 2014. In metalworking sector, the number of occupied posts in the sector was by 10.7% production volumes in 2014 were by 17.6% lower than a lower than a year before. In 2015, resuming of the year before. “KVV Liepājas Metalurgs” overtook the operation of “KVV Liepājas Metalurgs” will have a assets of the insolvent company and has resumed activity positive impact on the number of jobs in the sector. Figure 3.35

Indicators Characterising Production of Metal and Metal Articles Share of the sector in the output Production volume index* Changes in production volumes and of the manufacturing, 2014, % 2010 = 100 occupied posts, 4th quarter of 2010 = 100

220 158 Production volumes 9.0% (seasonally adjusted data) 180 136 Occupied posts

140 114

100 2015 2014 2013 2012 92 60 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months*, 2011 = 100 January-April 2015 the previous year 60 145 Due to prices Other countries Due to volumes CIS 25% Total 20 110 2% EU-15 Other 36% 75 EU -20 Exports Member On the domestic market States 40 15% -60 I IV VII X I IV VII X I IV VII X I IV I IV VII X I IV VII X I IV VII X I IV Lithuania Estonia 2012 2013 2014 2015 11% 2012 2013 2014 2015 11% Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

106 14 Metalworking 80 Manufacturing 101 6 70

96 Total -2 60 On the domestic market Exports 91 -10 50 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 * – Assessment of March and April 2015 by the Ministry of Economics

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 46 – 3. GROWTH

Production of electrical and optical equipment domestic market. The decrease in the turnover was has been the fastest growing sector of manufacturing influenced by a significant drop in producer prices - in since 2010. The share of this sector in the total output of December 2014, they were by 10.5% lower than a year the manufacturing has increased from 3.7% in 2009 to before. 6% in 2014. More than 90% of all production of the In the 4 months of 2015, the turnover of the sector sector is exported. was by 24.2% higher than a year before. In this period, In 2015, the output of the sector increased by 32.3%. the turnover of the exported production increased by Production of computers, electrical and optical 25.8%, and in the domestic market – by 9.4%. equipment contributed most to the growth of the sector. The increase in productivity contributed most to the Similar tendencies were observed in the sector in 2015 – growth of the sector, whereas the number of jobs has in January-April, the production volumes were by 23.4% increased at a moderate pace. In 2014, the number of higher than a year before. jobs in production of electrical and optical equipment In 2014, despite the increase in the output of the increased by 3.2%, but in the first quarter of 2015 the sector, the turnover was by 3.1% lower than a year number of occupied posts was even smaller than it was a before. The turnover of the exported production year before. decreased by 1%, whereas it shrank by 18.8% in the Figure 3.35

Indicators Characterising Production of Electrical and Optical Equipment Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100

370 2015 2014 310 Production volumes 6.0% 2013 2012 (seasonally adjusted data) Occupied posts 270 240

170 170

100 70 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 70 Due to prices 180 On the domestic market Other countries Due to volumes EU-15 Exports 18% Total 21% 40 150 CIS 120 12% Estonia 10 8% Other EU 90 Member -20 I IV VII X I IV VII X I IV VII X I IV Lithuania I IV VII X I IV VII X I IV VII X I IV States 2012 2013 2014 2015 20% 21% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

112 15 Production of electrical and 75 optical equipment 70 101 5 Manufacturing 65 90 Total -5 On the domestic market 60 Exports 79 -15 55 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 47 –

Machinery and equipment production is a sector In 2014, the turnover in the sector decreased by 13%. that provides means for production and technologies to In this period, the turnover of the exported production other sectors, therefore its development is closely related decreased by 5.7%, but in the domestic market – almost to the growth of other manufacturing sectors. On by one third. average, 80% of the production is exported. The largest In 2015, the turnover indicators of the sector export markets are EU-15 states, as well as Lithuania and improved owing to a gradual increase in the demand in Estonia. the export markets. In the four months, the turnover of Since 2013, the growth of the sector has been the sector was by almost 6% higher than a year before. affected by the weak demand in the largest trade partner During the said period of time, the turnover of the countries, and the pace of growth of the sector is exported production increased by 13.5%. moderate. In 2014, the production volumes in machinery As the growth of the sector has been moderate in and equipment production increased by 2.4%, but in the recent years, the pace of growth of the number of jobs four months of 2015 they were by 3.4% higher than in has also slowed down. In 2014, the number of occupied the corresponding period of the previous year. posts in the sector increased only by 0.5 per cent. Figure 3.36

Indicators Characterising Production of Machinery and Equipment

Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 205 160 2.2%

165 135

110 Production volumes 125 (seasonally adjusted data) 2015 2014 Occupied posts 2013 2012 85 85 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year

50 Due to prices 240 Other On the domestic market EU-15 Due to volumes countries 22% Total Exports 11% 20 190 CIS 140 24% -10 Estonia Other EU 16% 90 Member -40 I IV VII X I IV VII X I IV VII X I IV Lithuania I IV VII X I IV VII X I IV VII X I IV States 2012 2013 2014 2015 7% 20% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data 120 Total 14 80 On the domestic market Exports 110 1 75

100 -12 Machinery and equipment 70 production

90 -25 Manufacturing 65 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 48 – 3. GROWTH

The volumes of new orders in the domestic and In 2014, the turnover of the sector decreased by foreign markets and production volumes increased 9.3%. A significant increase was observed in sales income rapidly in the production of transport vehicles in the from the production sold in the domestic market that post-crisis period. In 2012, the production volumes in the increased by more than 50% in this period of time. The sector were by one third higher than in 2007. turnover of exported production in 2014 was by 14.5% The industry is characterised by explicit fluctuations lower than a year before. In the four months of 2015, the of production volumes. In recent years, on average 90% turnover of the sector was by 15.4% lower than a year of the production is exported. before, mainly due to a decrease in the amount of The orders finished in the previous years and the production sold in the domestic market. weak demand in foreign markets have affected the The explicit fluctuations of the production volumes in growth of the sector. In 2014, the output volumes the sector affect the number of employees of the sector. decreased by 15.2% due to the weak demand. In early In 2014, the number of occupied posts in the sector 2015, the situation in the sector slightly improved – in decreased by 1.9%, but in the first quarter of 2015 the January-April, the volume of production was by 2.4% number of occupied posts was by 6.2% lower than a year higher than a year before. before. Figure 3.37

Indicators Characterising Production of Transport Vehicles Share of the sector in the output Changes in production volumes and Production volume index of the manufacturing occupied posts 2010 = 100 2014, % 4th quarter of 2010 = 100 320 210 2015 Production volumes (seasonally 3.4% adjusted data) 2014 2013 Occupied posts 240 170 2012

130 160

90 80 I III I III I III I III I I II III IV V VI VIIVIII IX X XI XII 2011 2012 2013 2014 2015 Changes in the sales of production Sales of production, moving average of 12 Production exports by groups of countries % compared to the corresponding period of months, 2011 = 100 January-April 2015 the previous year 140 150 On the domestic market Other countries EU-15 Exports 11% 35% 40 120 CIS 5% 90 -60 Due to prices Estonia Other EU Due to volumes 16% Member Total 60 -160 I IV VII X I IV VII X I IV VII X I IV States I IV VII X I IV VII X I IV VII X I IV Lithuania 2012 2013 2014 2015 3% 30% 2012 2013 2014 2015 Changes in producer prices, Confidence indicator of the sector, Capacity utilisation rate % December 2011 = 100 response balance, seasonally adjusted data

104 Total 14 80 On the domestic market 101 Exports 0 70

98 -14 60 Vehicle production Manufacturing 95 -28 50 I V IX I V IX I V IX I I V IX I V IX I V IX I V I II III IV I II III IV I II III IV I II 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 3. GROWTH – 49 –

3.3 Forecasts

The latest EU’s and IMF’s forecasts were used in the Development prospects in 2016-2020 development of national economy development forecasts Faster and slower development scenarios have been of the Ministry of Economics for the analysis of external developed for the medium-term until 2020. The main markets and the evaluation of global economic assumptions of the scenarios are based on various global development trends (see section 2). economic development trends in the medium term.

National economy development in 2015 Figure 3.38 In the 1st quarter of 2015, the economic growth rates of Latvia reached 1.9 per cent. Latvian Gross Domestic Product Forecast In 2015, the development of Latvia’s economy will be (2007 = 100) still closely linked to export possibilities. Therefore the 120 highest risk for the growth of Latvia is linked with the global economic development. The export in 2015 will be Faster close to the level of the previous year. The Latvian export growth dynamics might be positively affected by the 110 scenario improvement of the economic situation in the wider sales market – the EU, as well as the capabilities of entrepreneurs to find sales markets in third countries. 100 Slower Export will also be affected by the food import growth restrictions set by Russia. The factors related to Russia’s scenario economic situation will have even more significant 90 impact on Latvia’s export capabilities. The latest forecasts of international institutions suggest that a decline is expected in the Russian economy 80

in 2015. This will in turn have a negative effect on the

2011

2012

2017

2013

2015

2014

2019

2010 2016 2018

2020

2007 2009 growth rates of the EU countries. More than 70% of all 2008 the Latvian export goes to the EU countries, therefore, a weaker demand in these markets will most probably slow Latvia as a small open economy with a relatively high down the growth of the Latvian export. degree of market liberalisation is significantly affected by Private consumption will continue to grow in 2015. global economic development and maintenance of stable Its dynamics will be mainly determined by the increase in competitiveness. The development dynamics of the EU’s wages which will be slower than in 2014. Improvements total economic space, as well as the improvement of the in the labour market will be more moderate than in the geopolitical situation, which was caused by the Ukrainian previous years. Whereas investments will be influenced crisis, are especially important. by the awaiting behaviour of entrepreneurs regarding In the medium term, economic advantages of Latvia future perspectives, as well as a cautious crediting policy are mainly linked with the achieved macroeconomic of commercial banks. stability, as a result of which Latvia’s credit ratings, as Sub-sectors of the manufacturing will retain different well as efficiency of planned aid programmes of development trends, and sectoral growth will be closely structural funds and the business environment improved. linked to the changes in demand in the main export Labour costs in Latvia are significantly lower than in markets. It is projected that production volumes in the the old EU Member States. Cheap labour force and manufacturing in general might exceed the level of 2014 comparatively high cost-effectiveness is a weak stimulus this year. Growth will continue in sub-sectors of the to change the business model and to create other manufacturing, where production volumes have been advantages of competitiveness. At the same time, an steadily growing, for example, in wood processing and increase in labour costs is inevitable because of the production of electrical and optical equipment. growth and the open labour market. Thus, without The growth in private consumption will promote appropriate structural policy measures Latvia may lose its growth of retail and other domestic market oriented competitiveness in low cost segments faster than gain sectors. Whereas, as evidenced by the latest statistical advantages in manufacturing of products with higher data, a very moderate growth is expected in the added value. construction sector in 2015. The weaker growth scenario is based on the The Ministry of Economics forecasts that in total assumption that global economic development is GDP growth rates will be within 2% in 2015. inhomogeneous, the EU’s recovery from the crisis is

slow, the geopolitical situation caused by the Ukrainian crisis does not improve. In the weaker growth scenario, annual export growth rates in this period will not reach

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 50 – 3. GROWTH

4%. Private consumption and investments are growing 2016 to 2020 might be within 3 per cent. slowly. In its turn, the average GDP growth rates from Table 3.14

Forecast of the Latvian GDP by Expenditure Items 2017-2020 2012 2013 2014 2015 2016 (annual average)* Fact Forecasts growth rates, % over the previous year

Gross domestic product 4.8 4.2 2.4 2.0 3.0 3.0 .. 4.6 Private consumption 3.0 6.2 2.3 2.6 3.2 3.1 .. 4.8 Public consumption 0.4 2.9 3.4 2.4 0.2 1.7 .. 3.1 Gross fixed capital formation 14.5 -5.2 1.3 -1.1 3.0 4.1 .. 5.5 Exports 9.8 1.4 2.2 2.4 2.8 3.4 .. 4.8 Imports 5.4 -0.2 1.6 0.7 2.1 3.2 .. 4.5

structure, %

Gross domestic product 100 100 100 100 100 100 Private consumption 61.2 61.9 61.5 61.9 61.9 61.6 .. 61.8 Public consumption 17.2 17.2 17.2 17.8 17.2 16.9 .. 16.7 Gross fixed capital formation 25.2 23.3 23.0 22.4 22.5 22.9 .. 22.6 Changes in inventories 0.8 0.6 1.1 1.0 1.0 1.0 .. 1.0 Exports 60.9 59.4 58.0 57.1 56.7 57.0 .. 56.4 Imports 65.3 62.3 60.9 60.2 59.2 59.3.. 58.5 Export-import balance -4.4 -2.9 -2.9 -3.1 -2.5 -2.3 .. -2.2

* structure at the end of the period

The rapid growth scenario envisages that growth in cost of resources. In the rapid growth scenario, in the Latvia’s main exports markets will restore and the medium term, export and the manufacturing keep advantages of the Latvian economy in competitiveness comparatively faster growth rates, which are based on are mainly associated with technology factors, the competitiveness of the Latvian producers and growing improvement of production efficiency and innovation, external demand. In this scenario, GDP growth rates in and, to a lesser extent, with cheap labour force and low the medium term can reach 5% per year. Table 3.15

Forecast of the Latvian GDP by Sectors (real growth, % in comparison with the previous year) 2017-2020 2012 2013 2014 2015 2016 (annual average) Fact Forecasts

Gross domestic product 4.8 4.2 2.4 2.0 3.0 3.0 .. 4.6 Agriculture and forestry 7.5 -0.1 1.5 -6.1 2.8 3.0 .. 3.4 Manufacturing 4.6 0.0 -0.3 4.4 5.2 4.8 .. 5.6 Other industry -5.5 -3.3 -2.5 -3.9 2.9 2.5.. 3.4 Construction 14.5 7.5 8.1 2.9 5.7 3.4 .. 6.4 Trade and accommodation 1.7 4.8 2.3 2.3 3.4 3.1 .. 5.2 Transport and storage 6.9 1.6 3.2 -0.7 -0.2 1.4 .. 2.9 Other commercial services 5.2 6.0 1.3 2.4 2.7 3.3 .. 5.0 Public services 0.1 3.8 3.3 2.6 2.4 1.8 .. 3.1

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 51 –

4. MACROECONOMIC STABILITY

4.1 Public Finances

4.1.1 Fiscal Policy and Public Debt with a total fiscal effect of 16.9% of GDP: 6.7% on the income side and about 10.2% of GDP on the expense side. During the period from 2008 until 2012, Latvia Deterioration of the economic situation in Latvia in implemented measures for fiscal consolidation on average 2008 and 2009, which was influenced by the global to the extent of 3.4% of GDP per year. The budget financial crisis, significantly worsened the fiscal position consolidation activities implemented by the government, of the state. In order to keep the situation in the financial resulted in a gradual reduction of the budget deficit and sector under control, extensive budget consolidation was in 2013 it constituted only 0.7% of GDP. implemented in Latvia. In the period from 2008 until 2012, fiscal consolidation measures were implemented Table 4.1

General Government Budget 2010 2011 2012 2013 2014

Revenues (million EUR) 6528.3 7203.1 7880.2 8197.3 8535.0 (% of GDP) 35.9 35.5 35.7 35.3 35.5 Expenditures (million EUR) 7993.2 7881.5 8055.3 8369.4 8882.1 (% of GDP) 44.0 38.8 36.5 36.0 36.9 Balance (million EUR) -1464.8 -678.3 -175.1 -172.1 -347.0 (% of GDP) -8.1 -3.3 -0.8 -0.7 -1.4

In 2014, the general government budget deficit was government towards the European Bank for 1.4% of GDP or 347 million euros, which was by Reconstruction and Development (EBRD). 0.4 percentage points more than had been planned in the In the recent years, the general government budget Stability Programme of Latvia from the previous cycle. The deficit has consisted of the deficit in the central discrepancy was mainly caused by a one-time capital government budget, in the budgets of local governments, transfer for discharging liabilities of the central and the Social Insurance Fund (see: Figure 4.1).

Figure 4.1

General Government Budget Balance by Sub-Sectors (% of GDP)

2.4 3 1.8 1.2 1.3 -0.4 0.3 -0.1 -0.4 -0.6 -1.2 -1.7 -0.3 -0.5 -0.2 -0.4 0 0.0 -0.4 -0.9 -0.2 -0.3 -0.2 -0.6 -0.6 -1.5 -1.9 -2.3 -1.8 -1.9 -0.8 -0.7 -1.6 -3 -2.5 -1.4

-4.2 -3.3 -4.0 -6 Central government -5.5 -5.2 Local governments Social insurance fund -9 -9.0 -8.1 General government

-12 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 52 – 4. MACROECONOMIC STABILITY

In 2014, the budget deficit of the central government States (10 in 2013, 17 in 2012), the public budget in 2014 increased significantly, which was related to the above exceeded the Maastricht criterion, which is 3% of GDP. mentioned one-time capital transfer for discharging The highest ratio of general government budget deficit to liabilities of the central government towards the EBRD, GDP in 2014 was identified in Cyprus, Spain, Croatia and as well as for increased expenditures on compensation the United Kingdom. The budget deficit in these and social benefits. A decrease of the budget deficit was countries exceeded 5% of GDP. There was a budget observed in the other two sub-sectors of the national surplus in Denmark, Germany, Estonia and Luxembourg. government, especially in the social insurance fund, According to forecasts of the EC announced in the where a small surplus was observed. spring of 2015, the budget situation in EU will continue As shown in Figure 4.2, the overall budget situation to improve. The average level of the budget deficit in EU of the EU is improving. The average level of the budget in 2015 is expected to reach 2.5% of GDP. The highest deficit of EU in 2014 was 2.9% of GDP (in 2013, 3.2% budget deficit in 2015, which might exceed 4% of GDP, of GDP, in 2012, 4.2% of GDP). For 12 EU Member is expected in Croatia, Spain and the United Kingdom. Figure 4.2

Deficit/Surplus of the General Government Budget in the EU Member States in 2013 and 2014 (% of GDP)

-3

-7

2013

-11 2014 Maastricht criterion (-3%)

-15 LU DE EE DK LV SE BG AT CZ FI HU LT RO NL BE MT SK IT EU PL FR PT CR CY UK ES IE EL SI

According to the Stability Programme of Latvia the general government budget should not exceed -0.5% 2015–2018 submitted to the EC, the projected general of GDP, as stipulated in the FDL. Latvia had a structural government budget deficit in 2015 is 362.1 million euro deficit of 0.5% of GDP in 2012. Consequently, the task or 1.5% of GDP. Measures for strengthening the social in subsequent years is no longer the reduction of and national security, development of sustainable structural deficit, but rather its maintenance at the economy of Latvia, which would improve the public medium-term goal. welfare, as well as facilitation of business competitiveness While developing goals for a medium-term structural are set as a priority in the national budget for 2015. balance, a multi-stage approach is applied, which allows For the purpose of ensuring stability of the tax policy to ensure that the respective goals of structural balance and keeping the earlier commitment to reducing the tax are in compliance not only with the national approach, burden on the labour force, the personal income tax rate but with the conditions of the Stability and Growth Pact as was reduced from 24% to 23% as of 1 January 2015. well; also recalculating the difference of outputs Contributions to the second pension level were increased according to the EC standardised methodology. The from 4% to 5%. Since 1 January 2015, the minimum following targets for the structural balance of the general wage was also increased, from 320 euros to 360 euros. government budget are defined in the intermediate term: This is one of the approaches to implementing the -1% of GDP in 2016, -0.9% of GDP in 2017, and -1.2% strategic development goal of the state, namely, reduction of GDP in 2018. of income inequality within the population. Starting from A significant aspect is not only the development and 2016, plans include the introduction of a differentiated approval of the fiscal discipline framework, but also untaxed minimum. operation of instruments that actually implement the

Since the adoption of the Fiscal Discipline Law (FDL) framework of fiscal discipline in the process of budget at the beginning of 2013, the state fiscal policy has been formation and monitoring. The authority in charge of based on the concept of balancing the budget within the compliance with fiscal discipline requirements both economic cycle, i.e. the amount of structural balance of during the budget planning process and at the stage of implementation is the Fiscal Discipline Council, which

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 53 – was established in 2014. During development of the Law which it indicated that the principles and conditions of on the State Budget for 2015 and the Law on the Medium-term the FDL are generally complied with.

Budget Framework for 2015, 2016 and 2017, the Council The level of the national government debt in Latvia prepared a report on monitoring of fiscal discipline, in is still one of the lowest in the EU (see: Figure 4.3). Figure 4.3

General Government Debt in the EU Member States in 2013 and 2014 (% of GDP)

180

150 2013 2014 120 Maastricht criterion (60%) 90

0 EL IT PT IE CY BE ES FR UK EU HU DE AT NL MT SI CR PL FI SK CZ DK SE LT RO LV LU BG EE

The average level of public debt in EU states in 2014 After successful completion of the international loan was 86.8% of GDP (in 2013, 85.5% of GDP, in 2012, program, Latvia has repeatedly proved its ability to attract 83.7% of GDP). In 16 EU member states (in 2013, 16 financing on international financial markets on member states, in 2012, 14), public debt in 2014 exceeded favourable conditions, through organising public issuance the Maastricht criterion, which specify 60% of GDP. The of sovereign debt securities. highest public debt to GDP ratio in 2014 was observed in In 2015, the plan is to repay 1.2 billion euros of the Greece, Italy, Portugal, Ireland, Cyprus and Belgium, principal loan granted by the EC, and 60.05 million euros whereas the lowest public debt to GDP was registered in of the first principal loan granted by the World Bank. Estonia, Luxembourg and Bulgaria. As indicated by Thus, the amount of public debt is expected to decrease forecasts of the EC for the autumn of 2015, the average by 5.1% in 2015. ratio of public debt in the EU will slightly decrease in Figure 4.4 2015. General government debt in Latvia increased General Government Consolidated Gross Debt gradually until 2007. In order to provide funding for (by nominal value at the end of a year) performance of financial liabilities, the general 12 60 government debt started to grow rapidly in 2008, and by billion EUR (left axis) the end of 2010 it had reached 8496 million euros, or % of GDP (right axis) 46.8% of GDP. In late 2011 the general government debt 46.8 constituted 8659 million euros or 42.7% of GDP, and at 9 45 the end of 2012, 9013 million euros or 40.9% of GDP. 42.7 The debt slightly decreased at the end of 2013 and 40.9 38.2 40.0 constituted 8876 million euros or 38.2% of GDP. In 6 36.4 30 2014, the debt constituted 9633 million euros or 40% of GDP. The level of general government debt is mainly influenced by the central government’s debt, which 3 15 constituted 9012 million euros at the end of 2014. 9.9 8.4 18.6 It should be noted that a three-year international loan program was successfully concluded at the end of 2011. The amount loaned to Latvia had been planned at 7.5 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 billion euros. Taking into consideration that the economic and financial situation had improved, it was not necessary for Latvia to take the available loan in full. Latvia only used 4.4 billion euros.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 54 – 4. MACROECONOMIC STABILITY

By implementing timely borrowing measures 2013. The growing revenue was largely due to the growth according to the medium-term strategy, and by in tax revenue. continuing the implementation of a sustainable fiscal In the four months of 2015, revenue of the policy, it is possible to refinance the current debt consolidated general government budget was liabilities of the central government on favourable 3074.4 million euro, thus it grew by 12.4% compared to conditions in terms of interest rates and maturity, and in the same period of 2014. The growth in general budget a long-term time frame achieve decrease and stabilisation revenue was mainly determined by higher foreign of the level of the general government debt at a financial aid revenue and the growth in tax revenue. sustainable level, convincingly complying with the public Tax revenue constitutes about 3/4 of the entire debt criteria specified in the Maastricht Treaty. budget revenue. Other budget revenue is formed by non- tax revenue and revenue from foreign financial aid. 4.1.2 Budget Revenues1 In 2014, tax revenue was 6675.9 million euro – by 249.6 million euro or by 3.9% larger than in 2013. In 2014, the most significant contribution came from the A budgetary consolidation was carried out in Latvia growth in employment tax revenue which was promoted from 2008 to 2012 to stabilise country’s fiscal position by the growth in wages; and as retail turnover grew, during the economic crisis. Budget deficit dropped from revenue from value added tax grew as well. 9% of GDP in 2009 to 0.7% of GDP in 2013. In 2014, In the four months of 2015, tax revenue grew by the general government budget deficit was 1.4% of GDP. 4.9% compared to the same period of 2014 and was The goal of the government is to keep budget deficit low. 2252.4 million euro. In 2014, as the economy kept growing, revenue of The tax revenue plan in the general government the general consolidated budget grew as well and was budget in the four months of 2015 was fulfilled for 8535.9 million euro in 2014 or by 1.9% higher than in 99.5 per cent. Figure 4.5

General Government Consolidated GDP in Current Prices and General Government Budget Revenues by Months Consolidated Budget Revenues (million EUR) (4th quarter of 2008 = 100) 140 940 GDP in current prices 2012 2013 Generl government consolidated budget revenues 2014 120 2015 800

100

660 80

60 520 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I I II III IV V VI VII VIII IX X XI XII 2009 2010 2011 2012 2013 2014 2015

In 2014, as the average wage and the number of jobs Employment taxes constitute almost half of all the tax kept growing, employment tax revenue grew by 1.4% revenue. compared to 2013. 1 In 2014, personal income tax revenue was In the four months of 2015, employment tax revenue 1385.2 million euro and grew by 3.9% compared to 2013. grew by 4.7 per cent.

1 The section uses official data from monthly reports of the Treasury

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 55 –

Table 4.2

Budget Revenues (% of GDP) 2008 2009 2010 2011 2012 2013 2014 2015 I

General government consolidated budget revenue 33.4 35.6 36.1 35.7 37.1 36.1 35.5 39.9 I Tax revenue- 27.6 26.5 26.7 27.2 27.7 27.7 27.7 30.2 1. Indirect taxes 9.8 9.9 10.2 10.2 10.5 10.4 10.8 11.4 – value added tax 6.5 6.0 6.5 6.7 7.2 7.2 7.5 7.9 – excise tax 3.2 3.8 3.6 3.4 3.2 3.1 3.1 3.3 – customs duty 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 2. Income taxes and property taxes 9.3 7.5 7.8 7.7 8.0 8.0 8.0 9.1 – corporate income tax 2.9 1.5 0.9 1.4 1.6 1.6 1.5 1.6 – personal income tax 6.0 5.5 6.2 5.6 5.6 5.7 5.8 5.9 – real estate tax 0.4 0.6 0.7 0.8 0.8 0.7 0.8 1.5 3. Social insurance contributions 8.2 8.8 8.6 8.6 8.5 8.5 8.2 8.8 4. Other taxes 0.3 0.2 0.2 0.6 0.6 0.7 0.8 0.9 II Other revenue 5.8 9.1 9.3 8.5 9.4 8.4 7.7 9.7

In January-April 2015, personal income tax revenue Starting from 1 January 2014, the personal income tax was 445 million euro which grew by 3.8% compared to rate was reduced to 24%. The non-taxable minimum was the same period of 2014. also raised from 64 euro to 75 euro, the exemption for dependants grew from 100 euro to 165 euro and the Figure 4.6 minimum wage was increased to 320 euro. Total Tax Revenues by Months Starting from 1 January 2015, the personal income tax (million EUR) rate was reduced to 23%, tax inequality was eliminated in relation to the persons receiving a pension, with regard to 600 the general non-taxable minimum, as well as an attempt was made to reduce the administrative burden on families with children by motivating school-age children to work 560 during their summer holidays, etc. The minimum wage was also increased from 320 euro to 360 euro. The purpose of the labour tax reform is to ensure 520 labour taxes equal to those in Estonia and Lithuania in terms of costs in the competition of the Baltic States for investment and workplaces. When the total burden of 2012 2013 labour taxes is reduced, the risks of poverty and structural 480 2014 2015 unemployment, as well as grey economy and the motivation to evade payment of taxes will reduce as well.

440 I II III IV V VI VII VIII IX X XI XII

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 56 – 4. MACROECONOMIC STABILITY

Figure 4.7

Tax Revenues by Months (million EUR) Mandatory State Social Insurance Contributions Personal Income Tax (excluding the resources of state funded Value Added Tax pension schemes)

140 210 200 2012 2013 2014 2015 128 190 170

116 170 140

104 150 110

92 130 80 I II III IV V VI VIIVIII IX X XI XII I II III IV V VI VIIVIII IX X XI XII I II III IV V VI VIIVIII IX X XI XII Excise Tax Corporate Income Tax Real Estate Tax

70 58 48

65 46 36

60 34 24

55 22 12

50 10 0 I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII

In 2014, revenue from mandatory state social Figure 4.8 insurance contributions was 1976.1 million euro or by 0.2% lower than in 2013. General Government Consolidated Budget Starting from 1 January 2014, the state social Tax Revenues by Tax Groups insurance rate was reduced by 1 percentage point and is (2014, per cent) 34.09%, 23.59% of which are paid by the employer and 10.5% – by the employee. Mandatory state social insurance contributions reduced in 2014 because of changes in taxes. Consumption In the four months of 2015, revenue from mandatory taxes 34.9% state social insurance contributions grew and was Employment 660.9 million euro which was by 5.3% more compared to taxes the same period of 2014. 50.3% Revenue from consumption taxes constitutes one third of all the tax revenue. As a result of the increase in private consumption and therefore also the increase in retail turnover, consumption tax revenue into the public Resource taxes Capital budget in 2014 was by 8.6% higher than in 2013. 6.6% In the four months of 2015, revenue from taxes consumption taxes was by 5.7% higher than in the same 8.2% period of 2014.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 57 –

Starting from 1 January 2014, in the VAT sector of 11%. It is also planned that the micro-enterprise tax several VAT input tax deduction restrictions were rate will be 13% in 2016 and 15% in 2017. These changes cancelled, changes were introduced into the application were introduced to increase the social guarantees of the of VAT in real estate deals, VAT securities were employees of micro-enterprise tax payers. At the same introduced into petroleum product deals, etc. time, amendments to the Micro-enterprise Tax Law entered In 2014, value added tax revenue was 1803.7 million into force on 13 May 2015 providing for maintaining the euro and grew by 8.2% compared to 2013. micro-enterprise tax rate of 9% in 2015 and later on Starting from 1 January 2015, changes were during the first three years of operation with the status of introduced into the sector of value added tax, for a payer of micro-enterprise tax, but from the fourth year example, special value added tax calculation payment of operation the micro-enterprise tax rate will increase to schemes were introduced for electronic communication, 12% for micro-enterprise tax payers with a turnover broadcasting and electronic services, changes were made exceeding 7000 euro (see Section 6.8). to the procedure of application of the Law on Value In the four months of 2015, revenue from corporate Added Tax. income tax, in fact, remained at the level of the same In the four months of 2015, revenue from value period of 2014. added tax was 598.4 million euro which is by 4.4% higher Starting from 1 January 2014, changes were than in the same period of 2014. introduced into the real estate tax sector, for example, tax Starting from 1 January 2014, changes were exemptions were cancelled for cultural monuments introduced into the consumption part of excise tax protected by the state, the procedure of determination of (alcoholic beverages, tobacco and other excise products). the taxpayer for the immovable property belonging to the Changes for tobacco products were made by increasing state or local or regional government was changed, etc. excise tax for cigarettes, cigars and smoking tobacco. It Revenue from real estate tax in 2014 grew by 10.5% was decreed that excise tax for this product group would and were 190.9 million euro. increase every year until 2018. Starting from 1 January 2015, it is decreed in the real In 2014, revenue from the consumption part of excise estate tax sector that no more 12 months exemption tax increased as well. In 2014, tax revenue was from real estate tax after commissioning of a building is 330 million euro which was by 3.8% more than in 2013. applicable to the buildings which were built or Starting from 1 January 2015, it is decreed that excise reconstructed for economic operations. tax for tobacco leaves has the same rate as smoking In the four months of 2015, revenue from real estate tobacco. tax grew by 4.1% compared to the four months of 2013 In the four months of 2015, revenue from the and was 90.9 million euro. consumption part of excise tax grew by 5.4% compared The group of resource taxes is the smallest tax to the same period of 2014. group and it made 6.6% of all the tax revenue in 2014. In The ratio of capital duties in the total tax revenue in 2014, resource tax revenue grew by 1.5% compared to 2014 was 8.2%. In 2014, revenue from capital duties grew 2013. by 2% compared to the year 2013. In the four months of 2015, revenue from the In the four months of 2015, revenue from capital resource tax group grew by 7.2 per cent. duties grew by 1.7% compared to the same period of Starting from 1 January 2014, several changes were 2014. introduced into the resource tax sector, for example, rates Starting from 1 January 2014, changes were made to for new objects subject to natural resource tax and the corporate income tax sector the purpose of which increased natural resource tax rates were introduced (on was to promote investments and contributions to extraction of natural resources, on waste disposal, on research and development. For example, some of the contamination of air and water, on products harmful to changes were an extended possibility to apply a tax relief the environment, etc.). to new production process equipment, extended In 2014, natural resource tax revenue grew by 5% application deadlines for tax deductions for investments compared to 2013. made into supported projects, etc. Changes in the micro- Whereas in the four months of 2015, natural resource enterprise tax sector were made. tax revenue grew by 8.7%.

In 2014, revenue from corporate income tax dropped Starting from 1 January 2014, the excise tax rate for by 2.1%. It was mainly related to the drop in natural gas used in manufacturing was reduced, but excise contributions and the increase in repaid amounts. Repaid tax for petroleum gases and other gaseous hydrocarbons amounts grew by 3 million euro or 4.2% compared to was increased. 2013. Whereas contributions of corporate income tax In 2014, revenue from excise tax for petroleum dropped by 4.7 million euro or 1.1 per cent. products and natural gas was 418.6 million euro – by Starting from 1 January 2015, changes were made to 1.3% more than in 2013. the micro-enterprise tax sector, defining that those Starting from 1 January 2015, several changes were micro-enterprises which turnover does not exceed introduced into the excise tax sector that abolished 7000 euro will be subject to the micro-enterprise tax rate reduced excise tax rates for fuel, updated regulations on

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 58 – 4. MACROECONOMIC STABILITY the application of excise tax exemption on natural gas In general, in 2014, the expenditure on subsidies and used for heat supply in greenhouses. Changes regarding grants made 44.7% of all the budget expenditure. the application of an excise tax relief for diesel fuel for In the four months of 2015, the expenditure on agricultural needs were also determined. subsidies and grants grew by 5.9% compared to the same In the four months of 2015, revenue from excise tax period of 2014. for petroleum products and natural gas grew by 7.1% During the crisis, when the budget expenditure was compared to the level of the same period of 2014. reduced, capital expenditure was the first to be limited. Already in 2008, capital expenditure was smaller than the year before and it significantly dropped in the years 2009 4.1.3. Budget Expenditures and 2010. From 2011 to 2013, capital expenditure increased because of active absorption of the EU funds. After an extensive reduction of expenditure during Figure 4.10 the economic crisis, the expenditure of the general government consolidated budget has been gradually General Government Consolidated Budget growing since 2011. Revenues and Expenditures

In 2014, total expenditure of the general government (moving average of 4 quarters, % of GDP) consolidated budget was 8934.9 million euro which was 52 Subsidies and grants by 5% more than in 2013. Capital expenditures In the four months of 2015, general government Current expenditures* consolidated budget expenditure continued to grow and 39 Revenues increased by 6.3% compared to the same period of 2014 and was 2919.4 million euro. In 2014, the expenditure on subsidies and grants 26 grew by 7.4%. This drastic increase is mainly related to a higher expenditure for the absorption of projects of the EU funds in transport, entrepreneurship and innovations, as well as direct payments to farmers. Grants for 13 healthcare, as well as aid to milk producers, whose activities were negatively affected by sanctions of the 0 Russian Federation, also contributed to this increase. I II III IV I II III IV I II III IV I II III IV I It should be noted that the expenditure on subsidies 2011 2012 2013 2014 2015 and grants also grew during the economic crisis. This is largely related to the growing number of unemployed and * together with payments for loans and credits, as well as payments to unemployment benefits paid, costs of dismissal benefits the EU for employees dismissed in the public sector, as well as social benefits. In 2014, capital expenditure decreased by 4% compared to 2013. Figure 4.9 In fact, the ratio of capital expenditure in the total General Government Consolidated expenditure did not change – it made almost 10% of all Budget Expenditures by Months the general budget expenditure in 2014. (million EUR) In the four months of 2015, capital expenditure dropped by 6.1% compared to the same period of 2014. 1300 During the crisis, the current expenditure 2012 experienced significant reductions. To reduce the expenditure of the general government consolidated 2013 1100 budget, individual areas of public administration were 2014 optimised: the number of employees in ministries and 2015 public bodies, as well as their wages were reduced, and 900 the number of public agencies and hospitals was reduced. During the crisis, this expenditure was reduced the most. In 2008, the current expenditure made up more than half 700 of all the budget expenditure, while in 2014 its ratio was only 45.4 pe cent. In fact, the current expenditure did not grow in 2011 and 2012, yet it has been growing since 2013. 500 I II III IV V VI VII VIII IX X XI XII

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 59 –

Table 4.3

Expenditures of the General Government Consolidated Budget by Functions (per cent) structure against GDP 2011 2012 2013 2014 2015 I 2011 2012 2013 2014 2015 I

Expenditure – total 100 100 100 100 100 38.8 36.9 36.6 37.1 39.2 General government services 12.1 13.3 12.8 13.2 16.7 4.7 4.9 4.7 4.9 6.5 Defence 2.3 2.1 2.2 2.1 1.8 0.9 0.8 0.8 0.8 0.7 Public order and safety 4.4 4.5 4.8 4.9 4.7 1.7 1.7 1.8 1.8 1.9 Economic activity 19.0 18.6 18.7 18.1 15.0 7.4 6.9 6.9 6.7 5.9 Environmental protection 2.5 2.3 2.4 2.4 1.9 1.0 0.9 0.9 0.9 0.8 Management of municipal territories and housing 3.0 3.0 3.0 2.6 1.9 1.2 1.1 1.1 1.0 0.8 Health 7.8 7.8 7.6 7.4 7.2 3.0 2.9 2.8 2.8 2.8 Recreation, culture and religion 3.2 3.5 3.6 3.4 2.9 1.3 1.3 1.3 1.3 1.1 Education 17.1 16.6 16.4 16.7 15.9 6.6 6.1 6.0 6.2 6.2 Social security 28.5 28.2 28.4 29.1 31.9 11.0 10.4 10.4 10.8 12.5

In 2014, the current expenditure grew by 8.7%. Such largest contributors to the growth of expenditure. In a drastic growth was mainly caused by the increase of the contrast, the expenditure on management of local and minimum wage and the equalisation of wages of those regional government territories shrank. employed in the public sector. Similar trends in the dynamics of expenditure are In the four months of 2015, the regular expenditure observed in 2015 as well. increased by 6.1% compared to the same period of the Public demand is formed by public consumption or previous year. public services the value of which is defined by the scope According to the budget expenditure by functional of provided public services, as well as public investments categories, social protection, education, general that are capital contributions for budgetary funds. government services and economic activity were the Table 4.4

Public Demand (per cent) against GDP changes 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Public demand 22.8 23.2 22.0 20.2 21.5 -8.4 5.6 -0.4 -7.0 3.2 Public consumption 18.1 18.2 17.2 16.3 17.2 -8.1 3.1 0.4 -4.7 3.4 – central government* 10.4 10.2 9.2 8.6 9.3 -1.6 0.4 -3.1 -6.1 5.7 – local governments 7.8 8.1 8.0 7.7 7.9 -15.6 6.7 4.9 -3.1 0.9 Gross fixed capital formation 4.6 5.0 4.8 4.0 4.3 -9.6 15.5 -3.4 -15.4 2.1 – central government* 1.8 2.2 2.3 1.7 2.3 -15.8 34.9 2.6 -23.5 13.9 – local governments 2.9 2.8 2.5 2.3 2.0 -5.3 3.5 -8.2 -8.1 -8.8

* together with the social insurance fund

During the crisis, public demand drastically reduced. Whereas public demand reduced by 0.4% and 7% in In 2011, public demand grew by 5.6% because there was 2012 and 2013 respectively. This drop was largely caused a drastic increase in public budget expenditure on by the decrease of budget expenditure of the central investments and an increase in loan and regional government, as well as the drop in budget expenditure on government expenditure. investments.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 60 – 4. MACROECONOMIC STABILITY

In 2014, public demand started to grow again – by government on investments – by 13.9%. At the same 3.2%. This was caused by a faster increase in budget time, the expenditure of local governments shrank expenditure of the central government – by 5.7%, as well because the budget expenditure of local governments on as an increase in budget expenditure of the central investments reduced by 8.8 per cent.

4.2 Prices

4.2.1 Consumer Prices At the beginning of 2015, the most rapid rise in prices of the particular period in the last four years has been observed. In the five months of 2015, the consumer After the deflation caused by the crisis when the 12- prices increased by 2.3%. In May 2015, consumer prices month consumer price inflation decreased to -4.2% in grew by 1.2% (12-month inflation), but the average February 2010, prices started increasing again. In 2011, annual inflation was 0.6 per cent. the 12-month consumer price inflation was 4%, in 2012 – 1.6%, while in 2013 consumer prices decreased by 0.4%. Figure 4.11 In 2014, a moderate rise in prices was observed, and it was more rapid than a year before, though, the price Consumer Price Changes (per cent) changes were below the traditional level of seasonal fluctuations. The price changes in 2014 were mainly 18 determined by the rise in prices of services and tobacco, average annual as well as the drop in costs for transport (fuel) and food inflation 12-month inflation products. Global price dynamics of food products and oil 13 had a major impact. In December 2014, consumer prices grew by 0.2% (12-month inflation), but the average annual price level in 2014 was 6 per cent. 8 Table 4.5

Consumer Price Changes by Months 3 (per cent) compared to the compared to average corresponding -2 the previous during month of the 2007 2008 2009 2010 2011 2012 2013 2014 month the year previous year 2014 January 0.6 0.4 0.0 The main factors influencing prices in the five February 0.0 0.5 0.0 months of 2015 were: – the rise in electricity prices due to opening of the March 0.3 0.3 0.0 electricity market as of 1 January 2015 had the April 0.5 0.7 0.1 biggest impact on price increase. The electricity May -0.1 0.6 0.1 prices on average increased by 27.5%, raising the overall consumer price level by 0.9 percentage June 0.3 0.7 0.2 points. It was compensated a little by the drop in July -0.4 0.6 0.2 heat energy prices of 4.8% that reduced the August -0.6 0.8 0.3 overall consumer price level by 0.2 percentage points; September 0.5 1.0 0.4 – prices of food products increased by 2.5% in the October 0.0 0.7 0.5 five months of 2015, and they increased the November -0.3 0.9 0.6 overall price level by 0.6 percentage points. It should be noted that a rise in prices of food December -0.6 0.2 0.6 products at the beginning of a year is typical. The 2015 January 0.1 -0.4 0.6 increase of the prices for vegetables and fruit had February 0.3 -0.1 0.5 the largest impact among the seasonal factors. The rise in prices for the said products in January- March 0.8 0.4 0.5 May this year was one of the sharpest in recent April 0.6 0.5 0.5 years. The drop in prices of dairy products, in its May 0.6 1.2 0.6 turn, was the most rapid since 1997 (except for 2009), it was still under the influence of embargo

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 61 –

imposed by Russia as of August 2014. Prices of transport for road and rail transport services (the food products are largely determined by the global prices for transport services increased by 8.2%). price fluctuations. The prices of food products Fuel prices increased by 1.2% in the five months kept decreasing in the five months of this year of this year, and they raised the overall price level reaching the lowest point since September 2009. by 0.1 percentage points. In addition, the global In May 2015, compared to December, they oil prices in January-May increased on average by decreased by 10.2%, influenced by the drop in 3 per cent and in the second half of May became prices in all major groups of food products. Most stable at the level of USD 65 for a barrel. rapidly, the prices dropped for sugar and cereal owing to better crops than expected in export According to the forecasts of the Ministry of countries. Decrease in global prices of food Economics, the overall average annual inflation in 2015 products is related to slow trade activity and could be a little higher than in the previous year. The expectations of deflation, as consumers expect inflation will be related to the external factors: the even lower prices in the following months. Dairy dynamics of the prices for oil and food products. product prices in the world increased in February Figure 4.12 and March, but in April and May, a sharp decrease was observed; it was related to the embargo Private Consumption and Consumer Price Index imposed by Russia, the abolition of milk quota in (4th quarter of 2010 = 100) the EU, as well as the uncertainty about the procurement of dairy products by China in 2015; 120 – the increase in prices of clothing and footwear Private consumption characteristic of the season in March-May was the Consumer price index highest since 1997. In the five months of 2015, 115 the prices of clothing and footwear increased by 6.5% that raised the overall price level by 0.4 percentage points. The growth in prices was 110 influenced by a rise in prices of footwear (by 19.2%) that can be largely explained both by an increasing private consumption and rise in prices 105 of raw materials. Global prices of leather increased on average by 6% in January-April this year (in 2014 in total – by 14%); 100 – the rise in the prices in transport group by 2.2% I II III IV I II III IV I II III IV I II III IV I 2011 2012 2013 2014 2015 that raised the overall consumer price level by 0.3 percentage points. The rise in prices was influenced by an increase in the tariffs of public Figure 4.13

Consumer Price Index by Groups and Sub-Groups (December of the previous year = 100)

104 2012 2013 103 2014 2015 102

101

100

99 I II III IV V VI VII VIII IX X XI XII

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 62 – 4. MACROECONOMIC STABILITY

Figure 4.13 continued

Food and non-alcoholic beverages Administratively regulated prices Fuel

104 108 2012 2013 115 2014 2015

102 104 105

100 100 95

98 96 85 I II III IV V VI VIIVIII IX X XI XII I II III IV V VI VIIVIII IX X XI XII I II III IV V VI VII VIII IX X XI XII Alcoholic drinks and tobacco Clothing and footwear Other product and services groups

105 108 103

103 102 102

101 101

96 99 100

97 90 99 I II III IV V VI VII VIII IX X XI XII I II III IV V VI VIIVIII IX X XI XII I II III IV V VI VIIVIII IX X XI XII

In 2014, as compared to 2013, the average price level in the EU rose by 0.6%. It was due to a rise in service prices. Figure 4.14

Changes of the Harmonised Index of Consumer Prices in the EU Member States (12-month inflation, %)

2 1.3 1.3 1.2 1.0 1.0 0.9 0.8 1 0.7 0.7 3,0 0.6 0.5 0.4 0.4 0.3 0.2 0.2 0.1 0.1 0.0 0 -0.1 2,0 -0.3 -0.3 -0.6 -1 -0.8 -1.4 -2 May 2014 May 2015 -1.7

-3 MT RO LV AT PT SE BE CZ DE NL HU EE DK LU FR IT IE UK FI HR SK LT SP BG PL SI EL CY Source: Eurostat

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 63 –

In May 2015, compared to May 2014, the overall Among the Baltic States, the sharpest increase in the price level both in the EU Member States and the euro harmonised index of consumer prices in May 2015, as area rose by 0.3%. 12-month inflation grew most rapidly compared to May 2014, was in Latvia (by 1.2%). In in Bulgaria and Portugal, but the prices decreased more Estonia the consumer prices increased by 0.5%. In rapidly in Slovenia, Cyprus and the United Kingdom. The Lithuania, meanwhile, the prices decreased by 0.1%. In highest inflation in May 2015 was in Malta, Romania and May 2015, as compared to May 2014, the consumer Latvia, but the highest deflation – in Cyprus and Greece. prices of food, alcohol and tobacco slightly increased in all the Baltic States, mainly the prices for alcohol, tobacco Figure 4.15 and non-alcoholic drinks grew, but the prices in the Harmonised Index of Consumer Prices energy group decreased in all countries. (December 2012 = 100) Among the Baltic States, the prices in the group of non-alcoholic drinks, alcohol and tobacco rose by 1.5% 106 in Estonia, by 0.5% in Lithuania, and by 0.2% in Latvia. EU Estonia The energy prices decreased more sharply in Lithuania – Latvia Lithuania by 8.5%, in Estonia - by 3.5%, whereas the lowest drop 104 in energy prices was observed in Latvia – by 0.1%. Administratively regulated prices dropped in Lithuania and Estonia – by 2% and 1% respectively, while in Latvia 102 they increased by 1.5 per cent. It should be noted that in May 2015, as compared to May a year before, the prices for the service group in 100 Lithuania increased faster than in Latvia and Estonia – by 3.4% (in Latvia and Estonia – by 2.9% and 1.8% respectively). In May 2014, prices in Latvia were mostly 98 affected by the increase in prices of the group of services, I III V VII IX XI I III V VII IX XI I III V since apart from this group, a slight drop in prices was 2013 2014 2015 observed in the rest of the groups. Figure 4.16

Harmonised Index of Consumer Prices by Components (December 2012 = 100) Food products Total price index excluding Energy (including alcohol and tobacco) energy and food products 108 110 106

105 106 104 100 104 95 102 EU 102 90 Estonia Latvia 100 100 85 Lithuania

98 80 98 I III V VII IX XI I III V VII IX XI I III V I III V VIIIX XI I III V VIIIX XI I III V I III V VII IX XI I III V VII IX XI I III V 2013 2014 2015 2013 2014 2015 2013 2014 2015

4.2.2 Producer Prices In May 2015, as compared to May 2014, the overall producer price level in manufacturing increased by 0.1%. Within a year, producer prices of the products sold on After a rapid increase in 2010 and 2011, producer the domestic market and exported products decreased by prices showed a slight, though steady growth in 2012. In 0.1%. Producer prices increased in all industrial sectors, 2013, producer prices increased very moderately – by except for manufacturing. 0.3%. In 2014, as compared to 2013, producer prices Slightly over 60% of the manufacturing products are increased by 0.4%. Prices of the products sold on the being exported, therefore the overall dynamics of domestic market increased by 0.2% within a year, and producer prices are largely affected by the fluctuations of prices of exported products – by 0.6%. producer prices of exported products. Prices of exported

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 64 – 4. MACROECONOMIC STABILITY products are mainly determined by the dynamics of prices decreased more rapidly for exported products. It should of the main export goods of Latvia, including wood, be noted that in the course of the year, the prices of food metal articles and food products, on the world markets. products have significantly decreased throughout the The rise in prices of the products sold on the domestic world (by 20%). market was affected by the stabilising domestic demand. Figure 4.18 The overall level of producer prices in the manufacturing of Latvia in May 2015 decreased by 0.7%. Dynamics of Producer Prices in Manufacturing In the manufacturing, producer prices of products sold (December 2012 = 100) on the domestic market decreased by 1.5%, while the prices of exported products – by 0.2%. In the 103 manufacturing, producer prices were affected by the Russian embargo on food products, as well as the economic situation in the EU and Russia, as well as the 102 drop in the global prices of raw materials. It should be noted that in May 2015, as compared to May in the year before, a drop was observed in the prices of energy, 101 industrial and agricultural raw materials. PPI Figure 4.17 DPI 100 XPI Dynamics of Producer Prices (December 2012 = 100) 99 103 I III V VII IX XI I III V VII IX XI I III V 2013 2014 2015 PPI – producer price index 102 DPI – producer price index for the products sold on the domestic market XPI – producer price index for exported products

101 The growth rate of producer prices in the EU has been decreasing since the middle of 2011. It is mainly caused by the drop in food prices and in prices of 100 In total agricultural and industrial raw materials, which, to a In Manufacturing certain extent, has derived from a decreasing demand worldwide in response to the escalating debt crisis in the 99 euro area, deteriorating economic situation in other I III V VII IX XI I III V VII IX XI I III V 2013 2014 2015 developed countries, as well as a slowdown of the world trade growth rates and uncertainty about the expected fiscal consolidation in the majority of developed The fastest rise in producer prices in the countries. In 2014, the rise in the EU producer prices manufacturing by sectors within the year was observed continued to decrease due to the economic situation for the production of computers, electronic and optical between the EU and Russia, caused by the Ukrainian equipment (by 8.9%), production of clothing (by 4.7%) crisis, and the drop in the global prices of raw materials. and production of electrical equipment (by 2.5%). The In January-April 2015, the situation in the EU rise in producer prices in the said sectors was determined improved and a slight increase in producer prices has by an increase in the prices of exported production. been observed. When comparing the Baltic States, In the manufacturing, however, producer prices producer prices in the manufacturing decreased in all the decreased for food production by 4.3% and production Baltic States in April 2015, as compared to April 2014. of timber products– by 1.7%. The decrease in producer The sharpest drop was experienced in Lithuania due to a prices in food production was due to a more rapid decrease in the oil refining industry – by 6.6%, whereas in decrease in prices of the products sold on the domestic Estonia and Latvia, producer prices decreased by 1.9% market, whereas in timber products group the prices and 0.7% respectively.

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Figure 4.19

Producer Price Index by Months in Manufacturing (December 2012 = 100) (Changes compared to the corresponding period of the previous year)

106 4

Latvia EU 100 2

94 0

EU 88 Estonia -2 Latvia Lithuania 82 -4 I III V VII IX XI I III V VII IX XI I III I III V VII IX XI I III V VII IX XI I III 2013 2014 2015 2013 2014 2015

4.2.3 Foreign Trade Unit Value Indices products, but the most significant upward impact was made by the increase of the unit value of clothing and leather products, food products and chemicals and Taking into account a faster increase in the export chemical products. unit value, the trade conditions improved at the beginning of 2013; however, they worsened at the end of Figure 4.20 the year, and in December 2013, the unit value decreased by 0.4% for exported goods and increased by 0.4% for Exports and Imports Unit Value Indices and Trade imported goods. Conditions (export and import unit value indices December 2012 = 100; In 2014, the trade conditions slightly worsened. In Trade conditions, % compare to the corresponding period of the December 2014, the unit value decreased by 2.2% for previous year) exported goods, but increased by 3.1% for imported goods. The average level of export and import unit values 104 Trade Conditions in 2014 was mostly affected by the decrease of the unit Export Unit Value Index value for coke and petroleum refining products. Import Unit Value Index In April 2015, the trade conditions improved 102 significantly, with the unit value of exported goods exceeding the unit value of imported goods by more than 3 percentage points. The unit value of exported goods 100 increased by 1.9% in April 2015, as compared to the corresponding period of the previous year, but the unit value of imported goods decreased by 1.4%. The average 98 export unit value in April 2015, as compared to April 2014, was mostly affected by the increase of the unit value for agricultural products, computers, electronic and 96 optical equipment and base metals, as well as the decrease I III V VII IX XI I III V VII IX XI I III for coke and petroleum refining products, food products 2013 2014 2015 and pharmaceuticals. The average unit value of imported goods was mostly influenced by the drop in the unit value of coke and petroleum refining products and agricultural

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4.3 Balance of Payments

4.1.3 Current Account which was by almost 1 percentage point lower than a year ago and significantly lower than before the crisis (in 2007). Since the crisis, the external stability of Latvia has In the first quarter of 2015, the amount of export of significantly improved. The current account deficit of the goods was by 0.9% higher than a year ago, whereas balance of payments has decreased from 20.8% in 2008 import decreased by 3.4%, and the balance of external to 2.3% in 2013. The current account deficit in 2014 was trade reached 9.5% of the GDP. At the beginning of slightly higher than a year ago; this was largely influenced 2015, export was positively influenced by the increase of by a decrease of financial flows from the EU funds in the export of mechanisms and mechanical engineering, first half of the year. In the fourth quarter of 2014 and in timber, as well as products of the chemical industry. The the first quarter of 2015, the current account deficit export value of agricultural and food products reduced decreased and constituted respectively 1.4% and 0.4% of due to a significant decrease in prices. The export of the GDP. The average negative balance of the current transport vehicles and metal products also decreased. account in the last three years was 2.9% of the GDP, which does not exceed the indicative threshold Figure 4.21 determined in the early warning mechanism, and is considered sustainable. Current Account Balance (3-year average, % of GDP) In our neighbouring countries, the indicator of the current account balance is also close to the level of 6 balance, and the annual fluctuations are fairly insignificant. The current account balance in Estonia in 2014 was at the level of moderate deficit, whereas in 2.5 0 Lithuania there was a slight surplus. -0.7 -1.3 -2.8 -2.9 The condition of the Latvian current account balance is mainly determined by changes in the balance of -6 external trade. The external trade deficit is characteristic -8.4 to Latvia, and it increased in the years of rapid growth and decreased in the years of recession. Cyclic corrections of the current account were largely determined by a -12 Current account significant decrease of import. When the economy threshold (max +6%) stabilized, the amount of export also went up. However, -17.9 threshold (min -4%) the amount of export of goods increased faster than the -18.0 -18 import and the balance of external trade improved. In 2007 2008 2009 2010 2011 2012 2013 2014 recent years, the dynamics of export and import have become slower due to deterioration of the situation in the The balance of services is positive in Latvia. In the external environment. last three years, the annual surplus of the balance of In the last three years, the average annual deficit of services is on average 7.4% of the GDP. In 2014, the external trade remains at the level of 11.5% of the GDP. amount of export and import of services in actual prices Though slowly, since 2011, the deficit of external trade was by 1.4% lower than a year ago. The decrease in has been decreasing each year, and this is mainly export of services was mainly determined by the decrease facilitated by a faster growth of export than import. In of transport services due to the political instability in the actual prices, the amount of export increased by 3.1% in Eastern neighbouring countries and related sanctions. In 2014, which was mainly facilitated by an increase in the 2014, the surplus of balance of services decreased to export of timber and its by-products, and mechanical 7.4% of the GDP (in 2013, 7.6% of the GDP). In the engineering products. However, the export of metals and first quarter of 2015, the level of export of services was metal products decreased significantly due to termination by 5% and the level of import by 6.9% higher than a year of operations of the metallurgical plant JSC “Liepājas ago, and the balance of services reached 7.6% of the metalurgs”. The export of agricultural and food products GDP. The positive balance of services covers the deficit also decreased. of external trade almost by 80 per cent. The amount of import of goods increased by 0.4% in 2014 in current prices, which is much slower than export, and the deficit of external trade was 11% of the GDP,

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Table 4.6

Balance of Payments of Latvia (% of GDP) 2011 2012 2013 2014 2014 I–III 2015 I–III

A. Current account -2.8 -3.3 -2.3 -3.1 -3.5 -0.4 Trade balance -12.0 -11.6 -10.9 -10.1 -10.8 -9.5 Export 40.9 43.8 42.2 42.0 44.6 43.7 Import -52.9 -55.4 -53.2 -52.2 -55.4 -53.2 Balance of services 7.3 7.4 7.6 7.3 7.6 7.6 Net revenues 0.0 -0.6 -0.3 -0.8 0.5 1.9 Current transfers, net 1.9 1.6 1.3 0.5 -0.8 -0.4 B. Capital account 2.1 3.0 2.5 3.0 2.4 3.3 C. Financial account* -4.0 2.9 0.7 -4.5 -5.1 2.0 Direct investment 4.9 3.2 1.6 1.0 -1.0 3.2 Abroad -0.2 -0.7 -1.3 -0.4 -1.2 -0.7 In Latvia 0.1 0.0 0.0 0.0 0.0 0.0 Portfolio investment** -1.8 4.7 0.1 -0.5 10.8 -24.3 Assets -1.0 -1.8 0.0 -6.0 -6.8 -19.0 Liabilities -0.8 6.5 0.1 5.5 17.6 -5.3 Other investment -7.2 -5.1 -1.0 -5.0 -14.9 23.0 Assets -1.5 -1.2 0.0 -6.1 1.2 20.2 Liabilities -5.7 -3.8 -1.0 1.1 -16.1 2.8 D. Net errors and omissions 0.3 1.0 0.8 4.1 6.1 -3.4 E. Reserve assets 4.5 -3.6 -1.7 0.5 0.1 -1.5

* without reserve assets ** portfolio investments and financial derivatives

The balance of the initial income has been negative in is related to the increase in the activities of absorption of the last three years – the annual average constitutes 0.7% finances provided by the EU funds, including attraction of the GDP with relatively small fluctuations. These of finances from the European Regional Development fluctuations of the balance of net revenues are mainly Fund and the Cohesion Fund. determined by changes in the income of non-resident Figure 4.22 investments, as well as the inflow of finances of the EU funds. The deficit of net revenues in 2014 was 0.8% of Current Account, Investments and Savings the GDP, i.e. slightly higher than a year ago. This was (% of GDP) largely influenced by the decrease of credit flows, including subsidies of the EU funds received by Latvia. 45 In the first quarter of 2015, the balance of net revenues was positive (1.9% of GDP), which was facilitated by the 30 inflow of subsidies of the EU funds. Changes in the current transfers and capital account are mainly determined by flows of finances of the EU 15 funds and contributions made by Latvia into the EU budget. In 2014, the balance of current transfers account 0 had a surplus of 0.5% of GDP. Whereas, the balance of current transfers account in the first quarter of 2015 was Current account negative, i.e. 0.4% of GDP, due to a decrease of flows of -15 the EU funds and incoming personal transfers. The Savings surplus of capital account in 2014 constituted 3% of Investment -30 GDP, whereas, in the first quarter of 2015, it increased to 2007 2008 2009 2010 2011 2012 2013 2014 3.3% of GDP. The increase of surplus of capital account

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The large current account deficit in the pre-crisis end of the year, the financial account deficit decreased years represented a significant imbalance between the and in the first quarter of 2015 there was already a domestic investments and accruals. Since 2007, the level surplus of 2% of GDP. of national accruals showed a gradual growth, while the In the pre-crisis years, foreign investments were level of investments in the economy of Latvia decreased mainly attracted in the private sector. The unfavourable from 40% of GDP in 2007 to 23.9% of GDP in 2014. conditions in global financial markets weakened the The moderate deficit of the current account balance intensity of foreign investment flows, and the amount of indicates a balance between the accruals and the domestic private capital inflow has rapidly decreased since 2008. investment. The structure of attracted foreign capital flows has also changed since 2007. The balance of direct investments has been positive 4.3.2 Financial Flows for several years. Flows of foreign direct investments (FDI) have been moderate in the recent years reflecting The global financial crisis significantly influenced the precaution of foreign investors. The amount of FDI, cross-border financial and capital flows, causing major attracted in 2011, constituted 5.1% of GDP. Whereas, in corrections in the financial account of the balance of 2012 and 2013, this indicator decreased from 3.9% to payments. Since the end of the year 2007, the surplus of 2.6% of GDP. In 2014, the net inflow of FDI in Latvia the financial account (without reserve assets) decreased was fairly moderate and constituted 1.5% of GDP. This rapidly, and in 2009 the balance of the financial account situation was mainly determined by reduced investments was already negative, i.e. almost 6% of GDP. Since 2010, in the equity capital of companies, which was partially the deficit of the financial account has been decreasing. compensated by the increase of reinvested profit. At the same time, instability of financial flows is also The amount of FDI, attracted in the first quarter of decreasing. 2015, was almost 20 times larger than a year ago and constituted 3.9% of GDP. A faster increase of FDI flows The condition of the financial account balance in the is prevented by weak economic activities in the EU recent years has been mainly determined by stabilization Member States, as well as by the existing uncertainty activities in the financial sector, as well as by the public concerning geopolitical turmoil. sector debt restructuring and reduction policy. Figure 4.24 Figure 4.23 Inflow of Foreign Investments in the Economy of Latvia Inflow of Foreign Investments in the Economy of Latvia (billion EUR) by Types of Investments (billion EUR) 10.5 12

Private sector Other investment 7.0 Public sector 9 Portfolio investment* FDI 6 3.5

3 0.0 0

-3.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 -3 2007 2008 2009 2010 2011 2012 2013 2014 2015 I-III I-III

Generally, in the period from 2009 to 2011, there was Over the last three years, the share of portfolio a deficit in the financial account, respectively, 6.1%, 2.1% investments has been constantly changing. Fluctuations and 4% of GDP. Whereas, in 2012 and 2013, the balance of portfolio investment flows are significantly influenced of the financial account was positive, respectively, 2.9% by stabilization transactions of bank sector balances, as and 0.7% of GDP. well as restructuring of the external state debt. In 2013, In 2014, the balance of the financial account of the the portfolio investment balance had a small deficit (0.8% balance of payments (without reserve assets) was of GDP), however, in 2014, the account of portfolio negative, reaching 4.5% of GDP. The increase of the investments was positive at 0.4% of GDP. Due to the financial account deficit was mainly determined by the increase in assets of credit institutions, the balance of increase of assets of credit institutions in a form of debt securities and deposits in the first half of 2014. At the

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 69 – portfolio investments in the first quarter of this year was In total, the amount of attracted FDI in the Baltic negative – almost 20% of GDP. States in 2014 was 1259.6 million euros, which is by 13% Significant fluctuations are observed among other less than a year ago. Latvia attracted approximately 28% types of investment, which constituted a major part of of all FDI in the Baltic States, Estonia – 59% and total foreign investments until 2008. These are trade Lithuania – 13 per cent. credits, loans and borrowings, money and deposits etc. The external investments made by Latvian The account of other types of investments of the entrepreneurs have also become more moderate. The balance of payments has been negative since 2009 with investments of Latvian entrepreneurs in the form of pronounced fluctuations within quarters, which are direct investments in 2014 was almost by half lower than mainly influenced by the decrease of deposits in the bank in the previous year and constituted 0.4% of GDP. sector. The structure of incoming FDI, divided into types of The deficit of the account of other types of investments, shows that the majority of investments are investments in 2014 constituted 5% of GDP. In the first made in the equity capital. However, it should be noted quarter of 2015, the account of other types of that the share of reinvested profit is also significant. Since investments had a surplus equal to 23% of GDP. 2011, the annual share of reinvested profit on average Similarly to the portfolio investments, the balance was approximately 40% of attracted FDI. fluctuations of other types of investments are also mainly Figure 4.26 related to the stabilization activities of the financial sector and the debt restructuring policy of the public sector. Foreign Direct Investments in Latvia In general, it should be noted that incoming flows of (received during a quarter, million EUR) foreign investments are gradually stabilizing, however, they are much smaller than before the crisis. 600 Latvia’s gross external debt remained at a relatively high level. As shown by the data of the Latvian international investment balance, the gross external debt 300 constituted 145.7% of GDP at the end of March 2015. Whereas the gross external debt of the government reached 7129.8 million euros (29.5% of GDP). 0

Debt instruments 4.3.3 Foreign Direct Investments -300 Reinvested profit The intensity of FDI flows continues to be fairly Equity capital moderate. A similar tendency is observed also in our -600 neighbouring countries. I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I During the period from 2011 until 2014, the average 2009 2010 2011 2012 2013 2014 2015 annual inflow of FDI in the Baltic States was almost three times lower than in the pre-crisis years. The inflow dynamics of FDI became increasingly moderate in the recent years, which reflects the existing Figure 4.25 precaution of foreign investors. In 2011, the amount of Inflow of Foreign Investments in the Baltic States attracted FDI constituted 5.1% of GDP, whereas in 2012 (billion EUR) and 2013 this indicator went down from 3.9% to 2.6% of GDP. In 2014, the net inflow of FDI in Latvia was fairly 6.0 moderate and constituted 1.5% of GDP. This situation Lithuania was mainly determined by the reduction of investments Latvia in the equity capital of companies, which was partially 4.5 Estonia compensated by the increase of reinvested profit. In the first quarter of 2015, net flows of attracted FDI were more than 20 times higher than in the corresponding 3.0 period of the previous year, mainly due to the increase of obligations towards direct investors, and the investments made by foreign investors in the equity capital of companies. 1.5 According to the balance of Latvian international investments, the amount of FDI, accrued in the economy of Latvia at the end of March 2015, reached 12,447.9 0.0 million euros, whereas the share of this FDI constituted 2007 2008 2009 2010 2011 2012 2013 2014 almost 28% in the structure of the accrued foreign capital. In comparison with the same period in the

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 70 – 4. MACROECONOMIC STABILITY previous year, the level of accrued FDI increased by 8%, Russia. A larger proportion of accrued FDI in the which was influenced by an increase of direct structure of sectors is observed in the investments in investments accrued by entrepreneurs from Norway, bank intermediation, transactions with real estate and the Luxembourg, Finland, the United Kingdom, Estonia and manufacturing. Figure 4.27

FDI Stock By Groups of Countries FDI of EU Member States (million EUR, at the end of the period) (per cent, at the end of March 2015)

Country not specified Other 12 Other countries Sweden 13% countries Other developed countries 10% 29% 12% 4% New EU member states 11% Hungary 9% 9% 11% EU-15 2% 9 7% 9% 9% 10% Malta 11% 12% Luxembourg 3% 18% 20% 19% The 12% 11% 17% 4% 11% Netherlands 6 16% Finland 25% 12% 26% 24% 4% United 3 51% 49% 48% Kingdom 56% 55% Cyprus 52% 50% 50% 5% Lithuania 11% 5% Germany Denmark 0 Estonia 8% 2008 2009 2010 2011 2012 2013 2014 2015 6% 7% March

In general, the geopolitical structure of FDI accrued financial intermediation. Since the end of 2008, the direct in Latvia has not significantly changed. It is mainly investments of Sweden doubled, which was mainly constituted of EU investments. At the end of September related to mutual transactions in the banking sector 2014, FDI of the EU states constituted 70% of all between Estonia and Sweden. Due to these activities the accrued FDI and almost a half of this amount was accrued direct investments of Estonian entrepreneurs in constituted by the investments of the euro area countries. Latvia decreased almost by half and, at the end of March Sweden is a major investing country in the economy 2015, constituted 5% of the total accrued FDI (at the end of Latvia. At the end of March 2015, the investments of of 2008, 16.1%). It must be noted that in the first quarter Swedish entrepreneurs constituted almost 20% of the of this year the investments of Estonian entrepreneurs in total accrued FDI. These were mainly investments in the the economy of Latvia increased by 11.4 per cent. Table 4.7

FDI by Sectors (at the end of the period) Balance Structure (million EUR) (percentage) 2005 2007 2015 III 2005 2007 2015 III

Agriculture and forestry 64.6 130.3 442.5 1.6 1.7 3.6 Manufacturing 490.4 695.5 1474.2 11.8 9.3 11.8 Other industry 544.7 439.0 625.0 13.1 5.9 5.0 Construction 175.2 513.6 490.1 4.2 6.9 3.9 Trade and accommodation 577.4 1003.0 1407.2 13.9 13.4 11.3 Transport and storage 257.2 282.3 391.5 6.2 3.8 3.1 Financial intermediation 1062.9 2492.3 3310.5 25.6 33.4 26.6 Operations with real estate 283.9 662.3 1556.3 6.8 8.9 12.5 Other services 506.1 785.0 725.7 12.2 10.5 5.8 Unclassified activity 196.59 463.09 2024.9 4.7 6.2 16.3 Total 4159.1 7466.4 12447.9 100 100 100

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A high level of investments is reached also by strategy of the IDAL is oriented to qualitative handling of entrepreneurs from the Netherlands, Cyprus, Germany, incoming investment projects and active operation in Norway, Russia, Estonia, Lithuania, Denmark and the attracting investment projects through addressing United Kingdom. At the end of September 2014, the potential investors. amount of investments provided by these countries Handling of incoming investment projects in 2014 constituted 70% of the total accrued FDI in the economy was quite extensive – 449 requests for investment of Latvia. It must be emphasized that in the recent years information were processed, and 109 investment offers the activities of Asian investors in Latvia have increased. were prepared by the agency. In representations of the At the end of March 2015, the accrued FDI of Asian IDAL, meetings with 167 potential investors, as well as countries constituted 2.5% of the total FDI in the visits to Latvia for 114 potential investors have been economy of Latvia, which was almost three times higher organised. In total, the agency has worked with 225 compared to the end of 2008. The investments of projects of potential investments (in 2013 this number Finnish and Irish entrepreneurs in the economy of Latvia was 176 projects), continuing the work with investment were significantly lower. projects initiated in the previous years, working with The major share of FDI was attracted in the service projects started in 2014, and also with projects for which sectors. post-servicing activities were executed. During the years of rapid growth, the structure of 15% of all projects notified by foreign investors in incoming FDI flows was clearly dominated by the 2014 represent metal processing and mechanical investments in the sector of financial intermediation. The engineering sectors, however, taking into consideration annual amount of FDI in the service sector on average projects in the sector of electronics, these projects was almost four times higher than in the manufacturing constitute one fifth of all projects. Among the projects, sector. service centres is the next most popular sector (13%), Since 2010, the structure of incoming FDI flows in followed by life sciences (10%) and information Latvia has become more even, without a clear technologies (7%). It must be noted that the number of predominance of the financial sector. However, it must projects notified in the sector of information be emphasized that, during the last three years, the technologies has doubled, compared to the year 2013. investments in service sectors have been almost five The number of projects reported in other sectors of times higher than in manufacturing sectors. services and manufacturing is increasing, for example, in At the end of March 2015, the amount of the accrued education, engineering, mineral exploration, peat FDI in the service sector constituted 75.6% of the processing, manufacturing of polymer pipes, light accrued FDI in the economy of Latvia. It was by 58% industry etc. is also increasing. higher than at the end of 2007. Almost a half of the In total, 58% of potential investors the IDAL worked accrued FDI in the service sector was constituted by with in 2014 come from European countries. The largest sectors of financial intermediation and real estate. number of potential investment projects the IDAL At the end of March 2015, the amount of accrued worked with in 2014 come from countries having the FDI in manufacturing sectors constituted 24.4% of the IDAL representations (with the exceptions of USA, total amount of accrued FDI in the economy of Latvia. It Finland and Italy), with the leading countries being was by 70.5% higher than at the end of 2007. Russia, Sweden, USA, Norway and Germany. The amount of investments in the manufacturing has In 2014, 18 investors had made a positive decision on increased significantly. In the period from the end of implementation of new investment projects, and 15 2007 until the end of March 2015, the amount of accrued investors – on extending the existing projects. In case of FDI in the sector of manufacturing increased more than full implementation of these projects investments in the twice, which was significantly influenced by the large amount of 139 million euros are expected, creating 1120 investments in the manufacturing of construction new jobs. materials, timber processing and food industry. As regards the interest shown by investors in the first In general, upon assessing the changes in the quarter of 2015, the agency has already worked with 127 structure of the accrued FDI in the manufacturing from potential investment projects. Almost one fifth of these the perspective of quality, it has to be concluded that the projects represent sectors of metal processing, share of sectors of low technologies becomes smaller in mechanical engineering and electronics. Most of potential favour of sectors of medium low and medium high investment projects the agency worked with in the first technologies. quarter of 2015 come from the Netherlands, Ukraine, Although FDI flows in the Latvian manufacturing Sweden and Germany. have been fairly sustainable even in the years of the rapid In the first quarter of 2015, decisions on their decline, it has to be noted that Latvia is lagging behind implementation in Latvia are already made for 10 Lithuania and Estonia in terms of the amount of accrued projects, for the total amount of 6.535 million euros, and FDI in this sector. in case of full implementation of these projects 170 new The Investment and Development Agency of jobs will be created. 3 of these projects are expansion Latvia (IDAL) played a major role in the attraction of projects. As few of the companies, which have made foreign investments in Latvia. The investment attraction positive decisions in 2014 and the first quarter of 2015

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 72 – 4. MACROECONOMIC STABILITY the following companies can be mentioned: the Belgium- One of the main obstacles in the attraction of based chemistry company Allnex, which has opened a investments mentioned both by existing and potential joint service centre of finances in Latvia, the Finnish investors is ensuring accessibility of qualified workforce company Kaskipuu — the second largest producer of at the moment and in the near future. This factor outer doors in Northern Europe, which has already significantly limits the potential expansion of operations acquired a manufacturing complex in Milzkalne, and within the investment projects already existing in Latvia. initially plans to create 13 jobs and invest 3 million euros Taking the initiative for solving this issue, the IDAL in the next year in launching the manufacturing process, addresses the responsible authorities on a regular basis, as well as the Russian producer of hygiene products emphasizes this problem in sectoral discussions and Cotton Club, which has already started the manufacturing participates in implementation of the Plan of Re- of its products in Liepaja, in co-operation with its emigration Activities for 2013–2016, developed by the cooperation partner, the Italian company Sanitars S.P.A. Ministry of Economy, through organizing activities, as and is currently employing already 77 employees. well as addressing the emigrated Latvian people in For improving attraction of significant investments various events, urging them to return to Latvia in order for Latvia, the IDAL continues successful to use the knowledge and experience obtained abroad for implementation of the methodology for attraction of launching entrepreneurship and building their welfare in investments – the POLARIS process, whose aim is to Latvia. attract export-targeted investments with a high added Regular work is continued in overcoming the detected value. The POLARIS process is based on the investment obstacles within the framework of the coordinated cooperation among the public, private and Coordination Council for Large and Strategically academic sectors. The main attention is paid to eight Important Investment Projects, as well as outside the priority sectors of investment attraction. Council, within the framework of daily work of the Within the framework of the POLARIS process, the POLARIS process. In April 2015, the 14th meeting of IDAL performs regular post-service visits to the existing the Coordination Council for Large and Strategically investors, in order to gather information about their Important Investment Projects took place. At the needs and obstacles at work, to summarize this beginning of 2015, the support for solving five problem information and to prepare recommendations for issues, submitted to the IDAL by foreign investors, has competent ministries, directly or through mediation of also been provided, outside the framework of the the Coordination Council for Large and Strategically Coordination Council for Large and Strategically Important Investment Projects. Important Investment Projects. Primarily, these issues One of the priorities of the IDAL operation within were related to communication problems with state the POLARIS process is working with local administration authorities or state capital companies, or governments. The IDAL is aware of and emphasizes the addressed restrictions of the legal framework or policy role of local governments in the improvement of progress, which were considered as unjustified obstacles business environment and in the process of attracting for entrepreneurship by the investors. The IDAL investments. In order to ensure closer co-operation, 4 continues actively working on all of these issues. new co-operation agreements have been concluded with Assessing global trends in the attraction of local governments (Ropazi, Carnikava, Aluksne and Preili investment, in 2015, it is planned to continue mainly regions) on a more active co-operation in the field of emphasising the role of the post-service activities in investment attraction. Agreements on co-operation making decisions concerning a new investment. This within the framework of the POLARIS process have approach promotes a raise in the satisfaction levels of been concluded with 26 local governments. foreign investors, which have already invested in Latvia, and thereby stimulates new investment decisions.

4.4 Financial and Capital Markets

4.4.1 Monetary Policy – to cooperate in the promotion of fast operation of payment systems in the Eurosystem; – to prepare and publish statistical information, The main goal of the Bank of Latvia is stability of according to the requirements of laws and price, which promotes long-term economic growth. Its regulations of the European Union. main tasks are: – to cooperate in the formation and implementation Since Latvia’s accession to the EU, the Bank of Latvia of the monetary policy of the euro area; has been a member of the European Central Bank – to manage financial investments; (ECB). Until the introduction of euro monetary policy, – to ensure movement of cash in Latvia and to instruments and procedures of performance of monetary participate in ensuring the movement of cash in operations were agreed upon, and the system of the euro area; management of foreign reserves of the central bank was

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 73 – adapted to ECB’s requirements. The Bank of Latvia uses The Bank of Latvia has been a member of the the same indirect monetary policy instruments based on Eurosystem since 1 January 2014 when euro was the free market principles as the ECB. The participation introduced. of Latvia in the European Monetary System means: The following monetary policy operations are offered – single currency with other member states of the by the Bank of Latvia to financial market operators for European Monetary Policy – euro; the implementation of monetary policies of the Eurosystem – single monetary policy across the euro area and the ensuring of liquidity of credit institutions: implemented by the ECB together with the – open market operations; central banks of the euro area; – marginal lending facility; – coordination of economic and fiscal policies – marginal deposit facility; between member states. – appropriate marketable assets in monetary policy operations of the Eurosystem.

Box 4.1

Eurosystem Being a member of the Eurosystem, the Bank of Latvia implements the ECB’s monetary policy in relations with its counterparties (the credit institutions registered in Latvia or the branches registered in Latvia of the credit institutions registered in other countries). Decisions on the monetary policy in the Eurosystem are taken by the ECB’s Governing Council. Members of the ECB’s Governing Council are governors of the central banks of all the countries in the euro area and six members of the Executive Board of the ECB. The President of the Bank of Latvia represents Latvia in this Governing Council. Members of the ECB’s Governing Council are independent in their opinions and voting. The purpose of the ECB’s Governing Council is to act in favour of the euro area. ECB’s duties are: – to approve guidelines and to take decisions necessary to ensure the implementation of the tasks entrusted to the Eurosystem; – to formulate the monetary policy of the euro area. This includes decisions referring to monetary objectives, the most important interest rates, supply of reserves of the Eurosystem and the development of guidelines necessary for the implementation of these decisions.

Decisions on interest rates are taken once a month; however, the ECB’s Governing Council can take decisions on interest rates at any time – also outside its regular meetings. The primary objective of the Eurosystem is to maintain the stability of prices. It should support EU’s general economic policy. The Eurosystem should act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources. The independence of the central banks of countries from government bodies and their decisions is a crucial prerequisite for successful implementation of the set objectives of the monetary policy. Institutional independence is required, because the monetary policy should be implemented based on medium and long-term prospects, and the implementers of the monetary policy are not allowed to succumb to short-term interests. Institutional independence means also the prohibition of the country’s central bank to finance any tasks of the government or its bodies.

4.4.2 Market Structure and Development are planning to develop Citadele bank into one of the leaders of the banking sector in Latvia. The ERDB plans to keep its current 25% of the shares At the end of the 1st quarter of 2015, 17 banks were of the bank in its property; operating and 9 branches of the banks of the Member – despite the sale of the credit portfolio of AS States were registered in Latvia. 6 branches of the Latvian “Latvijas Krājbanka”, the bank’s bankruptcy banks operated in foreign countries. Banking services in proceedings continue. Judicial proceedings are Latvia can also be provided by credit institutions ongoing in Latvia and abroad fighting for the registered in countries of the European Economic Area recovery of different assets and monetary funds to or their branches which submitted applications to the be able to settle accounts with bank’s creditors. Financial and Capital Market Commission (FCMC).

Several significant changes took place in the banking The single supervisory mechanism of the European sector in 2014 and at the beginning of 2015: banks entered into effect on 4 November 2014 to – commercial activities of VAS “Latvijas Hipotēku implement a single supervision approach and to prevent un zemes banka” (Mortgage and Land Bank of problems in any of the countries. Its purpose is to make Latvia) were stopped and, starting from 1 January progress towards integrated financial supervision in order 2014, it was transformed into a development to restore trust to banks and to minimise costs of banks’ financial institution with a new name VAS bankruptcy. The banks’ single supervisory mechanism is “Latvijas Attīstības finanšu institūcija Altum” formed by the ECB and national competent authorities. (Latvian Development Financial Institution In case of Latvia, the ECB has overtaken supervision of Altum); the three largest banks (in terms of assets) – Swedbank, – on 5 November 2014, an agreement was signed SEB banka and ABLV Bank. As to other banks, these on the sale of 75% of shares of Citadele bank for tasks are still entrusted to the FCMC. The FCMC also 74 million euro, to a group of twelve international cooperates with the ECB providing information on investors and “Ripplewood”. The new investors

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 74 – 4. MACROECONOMIC STABILITY crucial supervision decisions with regard to other Latvian showed the fastest growth, while the OMX Riga index credit institutions.1 showed the lowest growth. In the 1st quarter of 2015, operational indicators of all The drop in crediting volumes promoted the growth the Latvian banks met regulatory requirements. The in banks’ contributions into securities. In the 1st quarter liquidity ratio of the banking sector was high – 63.7%, of 2015, the amount of central governments’ debt which exceeds the set minimum requirement more than securities in banks’ assets significantly grew (by 77.3%) twice (the minimum regulatory requirement is 30%). In compared to the 1st quarter of 2014, which was caused by 2013, the FCMC introduced individual high liquidity the growth in the amount of foreign central government requirements depending on amount of non-resident securities. The amount of other securities also deposits in total assets of banks. significantly grew (by 76.2%). As to other securities, The level of capitalisation of the banking sector bonds of other issuers and other debt securities with continues to grow. In the 4th quarter of 2014, the average fixed income showed the fastest growth (by 86.5%). capital adequacy indicator in the banking sector reached 20.85% (the minimum regulatory requirement is 8%), 4.4.3 Assets, Deposits and Loans which is the highest indicator in the last years. The return on assets (ROA)2 grew to 1.35% and the return on equity (ROE)3 grew to 12.9%, which are the highest indicators An increase in the Latvian bank assets was observed since the end of 2008. at the end of 2013 in connection with the expected The profitability of banks is still positive and in the introduction of euro – cash savings of the population three months of 2015 they operated with a profit of were transferred to bank accounts. Therefore, the 104.6 million euro. 15 Latvian banks and six branches of amount of cash in circulation shrank significantly and the foreign banks (their market share in the total assets of the use of non-cash in settlements significantly increased. banking sector is 96.6%) operated with profit in this However, when lats changed to euro, cash in circulation period. grew significantly from 667.8 million euro at the end of 2013 to 3593.6 million euro at the end of the 1st quarter The insurance market continues its stable of 2015. Since the introduction of euro, the increase in development. The number of insurance companies has cash in circulation has been moderate and no significant remained unchanged since 2013: 7 insurance companies fluctuations were observed. operated in Latvia in the 1st quarter of 2015, 2 of which Although a significant drop in banks’ assets was deal with life insurance and 5 – with non-life insurance. observed at the end of the 1st quarter of 2014, banks’ There are also 14 branches of foreign insurance assets grew again in later quarters and in the 1st quarter of companies. 2015 they made 31.2 billion euro, which is by 12% more In the 1st quarter of 2015, compared to the same than the year before. In total assets, the ratio of credits period of 2014, gross written premiums of insurance issued to non-banks shrank to 47.4% (compared to the companies grew by 9.1% and reached 112.4 million euro. 1st quarter of 2011 when bank credits made 65.5% of Life insurance written premiums grew most drastically in bank assets), but the ratio of securities has significantly the 1st quarter of 2015. The amount of gross paid grown. premiums grew by 8.9% reaching 55.1 million euro. In Since 2014, the amount of deposits continues to the 1st quarter of 2015, insurance companies worked with grow. In the 1st quarter of 2015, they made 22.3 billion 2 million euro profit: non-life insurance companies– with euro, which is an increase of 17.2%, compared to the 163 thousand euro profit, life insurance companies – with same period of the previous year. This has been the 1.8 million euro profit. In total, in the 1st quarter of 2015, fastest growth since the end of 2007. The amount of the insurance companies earned by 44.7% less than in the non-resident deposits grew faster – by 31% and exceeded same period of the previous year. the amount of local deposits making 55% of the total From the end of 2011 to 2013, the situation in the amount of deposits. 9.1% in the structure of non-resident Latvian securities market significantly improved. In deposit holders are deposits of the CIS countries, 18.5% 2014, the situation slightly worsened, and the OMX are deposits of other EEA countries and 27.1% are Baltic Benchmark index value slightly dropped. The index deposits of other countries. However, it should be taken value of NASDAQ OMX Riga and NASDAQ OMX into account that banks working with non-resident Tallinn shrank; however, if we look at a longer period deposits are subject to higher requirements to liquidity (3 years), indexes of the Baltic market have significantly and capital adequacy. Most of resident deposits are in grown. At the beginning of 2015, the value of all the euro (89.6%), but, as before, most of non-resident indexes continued to grow as well. Since the beginning of deposits are in US dollars (68.3%). the year, the NASDAQ OMX Tallinn index value

1 Of all 6000 banks in the euro area, 123 largest banks of the euro area (according to approved criteria) are directly supervised by the ECB. These banks hold almost 82% of the bank assets of the euro area. 2 ROA – profit/loss ratio to assets. 3 ROE – profit/loss ratio to equity and reserves.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 75 –

Table 4.8

Monetary Indicators of the Latvian Banking System At the end of the period, billion euro 2007 2008 2009 2010 2011 2012 2013 2014 2015 I

Net external assets -6.4 -8.4 -4.3 -1.7 -0.3 0.9 1.2 -1.8 -1.7 Net internal assets 15.2 16.9 12.6 10.8 9.5 8.8 8.6 11.3 11.1 Domestic loans 18.5 20.3 17.4 16.0 15.7 13.7 13.5 12.6 13.3 to government (net) -0.1 -0.5 -2.1 -2.0 -0.9 -1.3 -0.7 -0.5 0.2 to companies and individuals 18.6 20.8 19.5 18.0 16.7 14.9 14.1 13.2 13.1 Other assets (net) -3.4 -3.5 -4.8 -5.1 -6.2 -4.9 -4.8 -1.3 -2.1 Broad money M2D 8.8 8.4 8.3 9.1 9.2 9.6 9.8 9.4 9.4 Cash in circulation (without balances in bank tills) 1.3 1.2 0.9 1.1 1.5 1.5 0.7 3.7 3.6 Deposits of individuals and companies 7.5 7.2 7.3 7.9 7.7 8.1 9.2 9.5 9.4 including: marginal deposits (residents) 4.1 3.3 3.1 4.0 4.4 5.1 6.6 7.0 7.0 fixed-term deposits 3.4 3.9 4.2 4.0 3.3 3.0 2.6 2.5 2.4

Changes in % to the same period of the previous year

Domestic loans 31.8 9.7 -14.5 -8.1 -1.5 -13.1 -1.4 -5.9 -1.7 including: to companies and individuals 34.0 11.8 -6.6 -7.6 -7.4 -10.4 -5.3 -6.8 -3.9 Broad money M2D 12.6 -3.9 -1.9 9.8 1.5 4.5 2.0 -3.6 5.9 Cash in circulation (without balances in bank tills) -7.1 -3.8 -22.9 21.0 28.8 4.1 -56.6 461.0 3.4 Deposits of individuals and companies 16.9 -3.9 1.7 8.3 -2.4 4.5 13.2 -3.6 5.9 Gross domestic product (at current prices) 32.3 9.3 -18.7 -2.2 11.7 8.7 5.6 3.6 2.6

At the beginning of 2015, the total credit portfolio of balance of granted bank loans dropped by 3.5% at the banks continued to shrink, yet the shrinking rates end of the 1st quarter of 2015, compared to the same decreased. This is mainly related to the repayment of the period of the previous year. previous credits and writing off of bad debts. The Figure 4.28

Loans Granted to Resident Financial Institutions, Non-financial Companies and Households (structure, at the end of the period, billions of euro and %) (growth to the corresponding quarter of the previous year, %)

28 Other loans 30 Mortgage loans Mortgage loans Loans for consumer goods 20 Commercial loans and industrial loans 21 Industrial loans Commercial loans 10

14 57% 0 56% 58% 58% 57% 55% 55% 55% 54% 53% 7 -10 13% 13% 14% 13% 17% 17% 18% 17% 17% 17% 19% 20% 18% 16% 15% 15% 16% 18% 18% 18% -20 0 I III I III I III I III I III I III I III I 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 I 2008 2009 2010 2011 2012 2013 2014 2015

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 76 – 4. MACROECONOMIC STABILITY

Although in 2014, the amount of newly issued credits households to cover the first instalment, as well as shrank significantly (by 22%), compared to 2013, the insufficient income of households. situation improved at the beginning of 2015, and in the Crediting business also remains low, and companies 1st quarter of 2015, in the whole banking sector, newly tend to use internal company’s financial resources. The issued credits made 601.9 million euro which was by 21% readiness and the ability of companies to invest into more than the year before. However, it should be taken development of companies is low. According to the SEB into account that the amount of issued credits in the 1st bankas’ research Baltic Business Outlook, 54% of the quarter of 2014 was very low. The amount of newly Latvian businessmen were ready to invest into business in issued credits to non-residents has grown by almost 50%, 2013, only 37% of the respondents had such plans in and their ratio in the amount of newly issued credits is 2014, and only 28% of the Latvian businessmen are going almost 60%, which is by 10 percentage points more than to implement investment projects in 2015. A similar the year before. In the banking sector, the total ratio of downward trend shows up in crediting data. Since the credits issued to non-residents in the total credit portfolio beginning of 2015, the amount of newly issued credits to makes 15.3 per cent. businessmen has slightly grown, however, it is still at a Crediting of households is gradually improving, and low level. In the 1st quarter of 2015, the amount of newly in the 1st quarter of 2015 the amount of newly issued issued credits to companies grew by 5%, compared to the credits grew by 21% and made 14% or 83.6 million euro same period of the previous year and made 26% or of the total amount of newly issued credits. However, the 154.4 million euro of the total amount of newly issued total dynamics of the household credit portfolio remains credits; however, shrinkage is observed in almost all of negative. In terms of amount, most of newly issued the main sectors of the national economy. Growth (by credits were issued for purchasing homes. Crediting of 19%) was observed in the manufacturing. The entire homes remains hindered by limited opportunities of dynamics of the credit portfolio of companies is still negative. Figure 4.29

Loans to Residents by Sectors of Economy (changes in balances, at the end of the 1st quarter of 2015, (structure, at the end of the 1st quarter of 2015, %) compared to the end of the 1st quarter of 2014, %)

Agriculture and forestry Agriculture Other Manufacturing and forestry services 6% Other industry 7% Manufacturing Construction Real estate 13% activities Trade and accommodation 32% Other industry Transport and storage 8% Other commercial services Construction 6% Public services Financial and Trade and Financial and insurance activities accommodation insurance Transport and activities 11% Real estate activities storage 9% 8% -15 0 15 30

No significant changes are observed in the credit respectively), but balances of commercial credits slightly structure. Mortgage credits are still predominant in the grew in comparison to the same period of the previous credit structure issued to domestic companies and year. In terms of amount, most credits were issued in real individuals, the ratio of which shrank to 53.5% in the 1st estate activities and manufacturing. quarter of 2015. The ratio of commercial credits and If broken down by sectors of the national economy, industrial credits in the total credit structure has slightly real estate activities make the largest credit balance ratio grown and is 34.8%. The ratio of consumption credits in (32% of total credits issued). A relatively high ratio of the total credit structure is 2.6%. At the end of the 1st issued credits is also in activities of the manufacturing quarter of 2015, balances of mortgage credits and (13%), trade, accommodation and catering services (11%) industrial credits shrank the most (by 4.9% and by 3.7%, and financial and insurance activities (9%).

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 4. MACROECONOMIC STABILITY – 77 –

Figure 4.30 Although the quality of credits continues to gradually improve, in the 1st quarter of 2015, the amount of credits Loans With Overdue Payments with outstanding payments in the total credit portfolio of (billion euro) banks was 13.1%, which is by 0.8 percentage points more than in the previous quarter. The improvement of the 4.0 Up to 30 days quality of the credit portfolio of banks is mainly related to From 31 to 90 days writing off of the bad debts. 3.2 From 91 to 180 days Banks still continue to work with customers who face Over 180 days difficulties to repay their credits. The ratio of restructured 2.4 credits and credits in the process of recovery reduces in the total credit portfolio of banks. At the end of the 1st quarter of 2015, 15% of the total credit portfolio were 1.6 restructured credits and credits in the process of recovery. The ratio of restructured credits in the total 0.8 credit portfolio of banks reduced to 8.9%, while the ratio of credits in the process of recovery reduced to 6.1 per cent 0.0 I III I III I III I III I III I III I III I III I III I III I 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 4.31

Weighted Average Interest (Balances) Rates for Loans Granted in Credit Institutions (euro, per cent) To non-financial companies To households – for acquisition of housing

10 From 1 to 5 years Up to 1 year Over 5 years 10 8 Over 5 years

6 6

4 4

2 2 I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I 2007 2008 2009 2010 2011 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015

Short-term and long-term interest rates (for balances) household for purchase of home have also been of credits issued to non-financial companies have been shrinking since 2012; however, medium-term (1-5 years) shrinking in the last three years and are now almost equal. interest rates have slightly increased for credits issued to Interest rates (for balances) of credits issued to households for purchase of home since the end of 2014.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 78 – 5. LABOUR MARKET

5. LABOUR MARKET

5.1 Employment and Unemployment

The gradual improvement of the economic situation Since the middle of 2010, the number of employed also positively affects the situation in the labour market – people has been increasing gradually. According to the unemployment is decreasing and employment is Labour Force Survey data, the number of employed increasing. However, the improvements are slowing people has increased by 33.9 thousand or on average by down due to a gradual decrease in the base effect in the 8.5 thousand a year from 2011 until 2014. The increase in labour market, as well as the drop in the pace of growth employment is due to the recovery of economy – the related to external tendencies. GDP has increased by one fifth since late 2009. At the same time, the increase in employment has promoted a Figure 5.1 decrease in unemployment. The unemployment rate has GDP and Occupied Posts decreased by almost a half over 4 years. (4th quarter of 2005 = 100) Since 2007, the most rapid increase in the employment was observed in 2013 – the number of the 120 employed reached 893.9 thousand, which is by 2.1% or Occupied posts approximately 18.3 thousand more than in 2012. GDP Meanwhile, the employment rate increased to 58.2%, and 110 it was by 2.1 percentage points higher than in the previous year. In 2014, the situation in the labour market kept 100 improving, though slower than in previous periods. On the one hand, this is due to the greater influence of demographic trends on the labour market, on the other 90 hand – due to the slower growth rate and increased productivity.

80 I III I III I III I III I III I III I III I III I III I 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 5.2

Employment and Unemployment in Latvia Employed Unemployment rate (aged 15-74, thousands) (aged 15-74, % of economically active population)

1080 19.5 1057 1055 20 1031 17.5 16.2 15.0 14.4 1010 15 13.7 972 964 12.5 955962 11.6 11.7 11.9 10.8 939934 10.0 940 10 909 7.7 894 7.0 885 6.1 876 862 870 851 5

800 0

2011

2012

2013

2012

2014

2013

2001 2010

2014

2001 2010

2002

2007

2003

2005

2002

2007

2004

2003

2005

2000 2008 2009

2006

2004

2009

2000 2008 2006

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 5. LABOUR MARKET – 79 –

The rate of unemployment decreased to 10.8% that 22 thousand or 2.2% over the year, if compared to 2013. was by 1.1 percentage points less than in 2013, but the It should be noted that the economically active rate of employment increased by 0.9 percentage points – population has been on a downward trend since the up to 59.1%. In total, 884.6 thousand inhabitants were beginning of 2013. The decrease of the economically employed in 2014, but 107.6 thousand inhabitants were active population is mainly affected by the negative looking for jobs, which is by 12.7 thousand less than in demographic trends. Despite the above, the economic 2013. activity of the population increased by 0.3 percentage In 2014, the number of economically active points and reached 66.3% among the inhabitants aged population kept decreasing – it dropped by almost 15-74 in 2014. Figure 5.3

Employment and Unemployment (thousands) Unemployed Employed (job seekers)

1000 240

950 200

900 160

850 120

800 80 I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV I I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015

Positive trends were observed in the labour market Figure 5.4 also at the beginning of 2015. In the first quarter of 2015, the number of employed population increased by 0.4%, if Registered Unemployed compared to the corresponding period in the previous (thousands) year. Overall, 884.1 thousand inhabitants or 59.7% of the population aged 15-74 were employed in the first quarter. 200 Compared to the first quarter of 2014, the employment rate has increased by 1.1 percentage points. 150 The rate of unemployment, if compared to the corresponding period in 2014, dropped by 1.7 percentage points – to 10.2% in the 1st quarter of 2015. Meanwhile, 100 if compared to the previous quarter, the unemployment Total rate remained unchanged. Along with the overall decrease in unemployment, 50 registered unemployment has decreased as well. The registered unemployment rate at the end of May 2015 Long-Term Unemployed decreased to 8.6% – 81 thousand unemployed were 0 registered, which was by 7 thousand fewer than in May I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V 2014. The highest registered unemployment rate 2008 2009 2010 2011 2012 2013 2014 2015 remained in Latgale region (18.9%), but the lowest – in Riga (5%). Almost one third of the total number of registered unemployed people was long-term The current unemployment rate is mainly related to unemployed (jobless for more than a year). cyclical unemployment, i.e. the significant drop in production volumes and services provided during the crisis. Therefore, all measures related to the promotion of economic activities and entrepreneurship foster an increase in the labour demand and employment growth.

REPORT ON THE DEVELOPMENT OF NATIONAL ECONOMY IN LATVIA | JUNE | 2015 – 80 – 5. LABOUR MARKET

At the same time, there is a risk that some of the the crisis. The economy is going through structural currently unemployed people will not be able to find a changes and mismatch can occur between the labour job for a longer period resulting in structural supply and demand – skills of job seekers do not match unemployment, as sectors that recover faster from the the employers’ requirements. crisis are not the ones where people lost their jobs during Figure 5.5

Number of Jobs In the Sectors of National Economy Private Sector and Public Sector (structure in 2014, per cent) (2005 = 100)

120 Agriculture and forestry 2% Public services Manufacturing 13% In the public sector 25% 110 Other In the private sector industy 3%

Construction 100 7%

Other commercial services 21% 90 Trade and accommodation 20% Transport and storage 80 9% 2006 2007 2008 2009 2010 2011 2012 2013 2014

The number of long-term unemployed people unemployed population. It should be taken into account increased along with the overall unemployment rate that the high level of long-term unemployment can cause during the crisis. However, the number of long-term the growth of structural unemployment, namely, the unemployed people has a tendency of decreasing along longer these people are without a job, the higher the risk with the growing economic activity since early 2011. At of losing work skills and knowledge. the end of May 2015, there were 25.8 thousand long-term At the same time, the balance between the labour unemployed people registered with the SEA, which was force demand and supply is influenced not only by the by 5.4 thousand or 17% fewer than at the end of May education level and skills of the labour force, but also by 2014. Although the situation is improving gradually, the wages, and therefore vacancies are not filled even under share of long-term unemployed people is still high – high unemployment conditions. approximately 1/3 of the total number of registered Figure 5.6

Changes in the Number of Jobs by Sectors of the National Economy (thousand, 2007-2014)

Increase in the number of jobs (2014 compared to 2010)

Decrease in the number of jobs (2010 compared to 2007)

Agriculture and forestry Manufacturing Other industry Construction Trade and accommodation Transport and storage Other commercial services Public services

-80 -60 -40 -20 0 20 40

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As the economic situation has stabilized, a steady 0.2%, which was mainly due to the decrease in the growth in the number of jobs has been observed since manufacturing and construction. mid 2010. According to the CSB data, the number of Meanwhile, the most rapid increase of occupied posts occupied posts in 2014 increased by 9.4 thousand or in the first quarter of 2015 was observed in the health 1.1% if compared to 2013. Meanwhile, the number of and social care sector, where the number of jobs vacancies increased by 5.9% or approximately 0.2 increased by 3 thousand or 5%, if compared to the first thousand jobs. quarter of 2014. In 2014, the number of occupied posts mainly Over the past few years, the number of jobs has increased in the services sectors. The most rapid increase significantly increased in the private sector. Following the of jobs in 2014, as compared to 2013, was in the 30% drop in the number of jobs during the crisis from information and communication services sector (by 2010 to 2014, the number of jobs in the private sector 10.2%) and health care (by 6.3%). The most significant increased by 19 per cent. decrease of jobs was observed in the manufacturing – by Meanwhile, the increase in the number of jobs has 2.9 thousand or 2.5%, as compared to 2013. The sharpest been comparatively slow in the public sector, where it has decrease in the number of jobs in the manufacturing was increased only by 1.7 per cent in the period from 2010 to in the metal production that was influenced by the 2014. termination of operations of JSC “Liepājas Metalurgs” in A more rapid increase in the number of jobs in the 2013, and in the production of clothing. public sector was observed in 2014, when the number of A slight decrease of occupied posts was observed at occupied posts increased by 1.5%, if compared to 2013. the beginning of 2015. In the first quarter of 2015, if In the private sector, the number of occupied posts compared to the corresponding period in 2014, the increased only by 0.9 per cent in the same period. number of occupied posts decreased by 1.8 thousand or

5.2 Labour Costs and Productivity

The dynamics of labour costs and productivity in was influenced by the increasing competition in the EU recent years was largely determined by the differences in labour market and the low competitiveness of Latvia the adjustment of labour and goods markets to the cyclic within it. The growth of productivity, in its turn, is more fluctuations of conjuncture. When the economic growth moderate, and this means that the competitive advantage resumed, the increase in wages became more rapid, and it of lower labour costs gradually is lost. Figure 5.7

Average Gross Monthly Wage of the Employed (EUR) Wage by Months Wage by Years

840 800 765 716 682 685 655 660 780 633

600 566

720 430

400 350 660 2012 2013 2014 2015 600 200 I II III IV V VI VII VIII IX X XI XII 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

The average gross wage in 2014 was 765 euro that The average gross wage in the public sector in 2014 exceeded the level of 2013 by 6.8%. If compared to the was by almost 10% higher than in the private sector (813 pre-crisis period – 2008, the average gross wage in 2014 and 741 euro respectively). In the private sector, the has increased by 12.2 per cent. wages increased by 7.5% in 2014, whereas in the public sector – by 6.1%. In the public sector, the wage in 2014

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essentially was at the level of 2008, while the wage in the rapidly – by 6.9%, whereas in the public sector – by 5.1 private sector was by 18.9% higher. per cent. In 2014, as compared to 2013, the average net wage The difference in wages across sectors has increased more rapidly than the average gross wage – by considerably decreased over the past years. In 2008, the 8.6%. It is related to the amendments to the Law On average gross wage in the private sector was by 22.7% Personal Income Tax made in 2014. It should be noted that lower than that in the public sector, while in 2014, the the increase in wages in 2014 was fostered by the changes difference was only 8.9 per cent. in the minimum monthly salary – the minimum monthly The balancing of wages was mainly due to various salary was increased to 320 euro in 2014. labour market correction mechanisms in the public and private sector. During the years of economic recession, Figure 5.8 the employment rate decreased considerably in the Average Gross Monthly Wage of the Employed in the private sector, while the decrease in the wages of Public and Private Sector employees was relatively moderate. However, the (EUR) decrease in the number of the employed people in the public sector was almost a half of that in the private 900 sector; the wages of employees were reduced considerably due to the necessity to limit the government budget expenditures. Wages have been gradually growing 750 since 2011, and their dynamics in the public and private sectors are relatively steady. Over the last six years, the average gross wage has 600 increased faster in the agriculture, manufacturing and trade sectors, whereas the wages in the public services sectors fall behind by almost 4% of the level during the In the public sector pre-crisis period due to the drop in wages during the 450 In the private sector crisis to limit the government budget expenditures. In 2014, as compared to 2013, the average gross wage increased in all sectors of the national economy. It 300 increased more rapidly in agriculture, construction, trade 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 and manufacturing. The wages keep growing in all sectors In the first quarter of 2015, as compared to the of the national economy in 2015. corresponding period in 2014, the gross wage increased by 6.1%. The wages in the private sector grew more Figure 5.9

Average Gross Monthly Wage by Sectors (EUR)

1000 2008 939 2014 916 On average in 2014 875 819 821 798 780 752 732 730 750 705 707 634 641 625 586 588 543

500

Construction

Other industry Other

Public services Public

Manufacturing

Commercial services Commercial

Transport and storage and Transport

Agriculture andAgricultureforestry Trade and accomodation and Trade

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Since 2011, the average gross wage in the major occupations remain. For instance, the wage in low- exports sector of Latvia – the manufacturing – has qualification occupations is 2.5 times lower than in high- increased more rapidly than on average in the national qualification occupations and 1.5 times lower than in economy. In comparison to 2008, the average gross wage medium-qualification occupations, whereas in the high- in the sector has increased by almost 20%. The rise in the qualification occupations wages are even by 1.7 times average gross wage was fostered by the increase in the higher than in medium-qualification occupations. sector’s output rate from 2009 to 2012, when When comparing the average gross wages in the manufacturing was the main driving force of the growth groups of occupations with the average national gross of the national economy. The most significant increase in wage, it should be noted that average wages in high- wages since 2008 has been in the traditional sub-sectors qualification occupation groups are by more than one of the manufacturing – production of non-metallic third higher than the national gross wage. Despite the mineral products, wood processing, paper productin and fact that wages in medium qualification occupations are publishing, food production, as well as in the sector of closer to the average national gross wage, taking into high technologies – production of electrical and optical account the specifics of certain groups of occupations, in equipment. The comparatively more intense increase in general, the wages in the medium-qualification wages in these sectors is largely related to the more rapid occupation groups are by almost one fifth lower than the growth of production volume and productivity. average wage. In low-qualification occupations, the wages In 2014, as compared to 2013, the wages in the are almost by half lower than the national average. manufacturing increased by 7%, while in the first quarter Wages are a considerable factor of cost of 2015, they were by 6% higher than a year before. The competitiveness, thus, the increase in wages must be positive dynamics of the wages are observed almost in all balanced with the increase in productivity. Otherwise, sub-sectors of the manufacturing. competitiveness in the tradable sectors will be lost, In terms of occupations, the wages increased in all which, as a result, will not ensure stable increase in the groups of occupations over the last five years – more total revenue (welfare). rapidly in the groups of occupations of high and medium Within the period from 2004 to 2007, wages qualifications, more moderately – in low-qualification increased almost five times faster than productivity, occupations. negatively affecting the international competitiveness of Latvia, as evidenced by the dynamics of production unit Figure 5.10 labour costs (ULC)1. Adjustments in the goods and Wages by the Groups of Occupations* labour markets caused by the crisis reduced the gap (In 2013, average gross wage = 100) between productivity and labour force costs resulting in a gradual improvement of Latvia’s competitiveness in 170 foreign markets. However, in recent years, positive ULC dynamics that are more rapid than on average in the EU 140 have been observed. It is largely due to a more rapid increase in labour costs if compared to productivity. The ULC dynamics are largely related to the cyclical 110 Average wage factors or crisis consequences since 2008. Commodity markets are much more sensitive to cyclical fluctuations 80 than labour markets, thus, during the initial stage of economic recession, output decreased more rapidly than the number of the employed, and productivity decreased. 50 In 2009, as compared to 2007, productivity in the

national economy of Latvia decreased by 7% in general. Clerks Since labour force costs continued to grow in 2008

(mainly due to growing dismissal costs), production unit Professionals

workers labour costs (nominal ULC) increased as well. In 2009, professionals

workers labour force costs reduced faster than productivity, and managers

and assemblers and the growth of productivity in 2010 resulted in the

Craft and related trades related and Craft

Elementary occupations Elementary Tehnicians and associate and Tehnicians

market sales workers sales market decrease in ULC by nearly 10%, suggesting the rising

Plant and machine operators machine and Plant competitiveness of the Latvian producers. Similar

Service workers and shop and shop and workers Service

Skilled agricultural and fishery and agricultural Skilled Legislators, senior officials and officials senior Legislators, tendencies were also observed in the manufacturing. * Calculation performed by the Ministry of Economics, data from the Since 2011, the dynamics of productivity have been more survey European Union Statistics on Income and Living Conditions (EU- moderate than the dynamics of labour force costs. In SILC). The occupation code at the main job as at the moment of survey. 2014, if compared to 2011, average annual productivity Occupations included in the 2-character level of Classification of Occupations, EU-SILC, and CSB. 1 ULC is defined as a relation between labour costs and labour productivity. If productivity is growing faster than wages, the ULC Despite a gradual growth in wages, significant decreases, which means that the competitiveness of the national differences in wages across different groups of expenditure increases and vice versa.

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increased by 3%, while the labour force costs increased by 8%, i.e., almost 2.5 times faster. Figure 5.11

Labour Force Costs and Productivity (left axis – % compare to the previous year; right axis – 2005 = 100) National Economy Manufacturing

45 Nominal ULC (left axis) 300 45 Nominal ULC (left axis) 300 Productivity (right axis) Productivity (right axis) Labour costs (right axis) Labour costs (right axis) 30 250 30 250

15 200 15 200

0 150 0 150

-15 100 -15 100

2011 2011

2012 2012

2013 2013

2014 2014

2010 2010

2007 2007

2009 2009

2008 2006 2008 2006

The labour force unit costs increased faster than activity rises. It means that the competitive advantage of productivity also at the beginning of 2015. In the first cheap labour costs is gradually lost. quarter of 2015, the labour force costs per employed The dynamics of nominal ULC in the medium-term person were by 5.4% higher than a year before, but will be mainly affected by structural factors, while the productivity increased by 2% resulting in the increase of influence of cyclical factors (for instance, economic the nominal ULC by 3.3%. It should be noted that the fluctuations in foreign trade countries) is expected to be overall gap between the growth rates of the labour force lower. One of the most significant factors for the costs and productivity has decreased, if compared to the increase in ULC is the increase in wages (convergence of pre-crisis years, and the increase in ULC is comparatively wages), which is largely influenced by the increasing moderate. However, the dynamics of ULC and competition on the EU labour markets and the low productivity of the last two years show that production competitiveness of Latvia in this area. unit labour costs will continue to grow as the economic Figure 5.12

Convergence of Productivity and Labour Force Costs (% of the average level in the EU) Productivity Labour Force Costs

50 50

40 40

30 30

National economy

20 Manufacturing 20

10 10 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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Labour force costs in Latvia are among the lowest in taken into account in the future. A more rapid increase in the EU. In 2014, labour force costs per one employee in wages may be related to the increase in the minimal wage, Latvia were 38% of the EU average, including in the entrepreneurs’ willingness to keep highly qualified manufacturing – 31.4%. It should be noted that the gap employees, decrease in the unemployment level etc. On of the labour force costs has decreased by almost 6 the other hand, the increase in wages may trigger percentage points from 2011 until 2014, whereas the considerable stimuli for innovations and investments in productivity of the national economy in Latvia in general new technologies to decrease the costs and increase the falls behind by 4 percentage points, but in the – only by 2 productivity of production resources, though, negatively percentage points. The equalisation of wages affecting competitiveness. (convergence) is an objective process, which must be

5.3 Labour Market Forecasts

Labour market forecasts until 2020 were developed Whereas, compared to the year 2014, the number of job- according to the national economy development seekers will reduce by more than 11 thousand – to about scenarios (see section 3.3). 96 thousands. The situation in the labour market is expected to Demand for labour will continue its growth trend also continue to improve in the years to come, at the same in the medium-term. However, the increase of time improvements will become more moderate, employment will be slower than growth, since output will influenced by a higher base effect in the labour market be mainly based on an increase of productivity. Faster and slower growth rates. Moreover, the situation will be increase in employment will also be hindered by negative influenced even more by the negative demographic demographic trends/labour force ageing, mismatch trends which will be observable not only in labour market between the demand for and supply of labour force, and indicators, but also in labour force availability. regional disproportions in the labour market. In total, 2015 is expected to show a low increase in By 2020, the employee number is expected to grow employment: the employee numbers will grow only by by about 3.1% or by about 28 thousand compared to 0.2% or by about 1.9 thousands, compared to 2014. At 2014. Thus, in 2020, the number of employed persons the same time, the level of employment will slightly might exceed 912 thousand, while the percentage of the exceed 60%. In total, in 2015, the employee number employed among the population aged 15-74 may grow to might reach 886.5 thousand. 64 per cent. Unemployment will continue to grow as well: the level of unemployment will get close to 9.8% in 2015. Figure 5.13

Employment Rate and Unemployment Rate (%) Employment Unemployment

65 18

60 14

55 10

50 6

45 2 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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In the medium-term, unemployment will continue to At the same time, a decrease in employee numbers is drop as well. By 2017, the unemployment level will drop expected in the primary sector: mainly in agriculture and to 7.8%, and the problem of insufficiency of labour force fishery, as well as in the sector of public services. The will become even more pronounced. In total, by 2020, drop in demand for labour force in agriculture is mainly the unemployment level might drop by about 6-7 per related to the measures to increase the efficiency of the cent. sector – the formation of co-operative partnerships of In 2014, the rates of economic growth in the majority farmers and large farms, the implementation of of economic sectors slowed down which was reflected systematised organisation of manufacturing, and the also in the growth of employment in sectors. Similar implementation of more complicated technological trends will be observed in 2015 – a weak increase in solutions into the manufacturing process. employment will be observed in the majority of Figure 5.15 economic sectors. In 2015, compared to 2014, the most significant Growth in Employment in Economic Sectors in 2015-2020 increase in the number of the employed is expected in (annual average, %) sectors oriented to domestic demand: in sectors of commercial services (by 1.4 thousand or 0.8%) and in Total 0.5 construction (by 0.3 thousand or 0.5%). The employee number will also slightly increase in the manufacturing, Agriculture -0.6 however, this increase will have slower rates than it was projected before, mainly because of high uncertainty in Manufacturing 1.1 relation to further operations of “KVV Liepājas metalurgs”, as well as the extension of Russian import Other industry 0.6 embargo to food products, incl. restriction of import of Construction 0.9 the Latvian fishery products for an indefinite period of time. Trade 0.8 At the same time, it should be noted that the role of sectors oriented to domestic demand in the labour Transport 0.4 market will continue to grow in the years to come. Growth in tradable sectors will be mainly based on the Commercial services 0.9 growth of productivity which will have a critical impact Public services -0.2 on ensuring competitiveness, and therefore an increase of employment in these areas could be relatively slower. -0.8 -0.4 0.0 0.4 0.8 1.2 By 2020, the number of employees in the majority of the sectors will increase. The most significant increase in employee numbers will be observed in the Overall, the situation in the labour market in the manufacturing, in the sector of commercial services, in medium and long term will be determined by the construction and trade. development of several significant factors. The most prominent uncertainty is still constituted by the Figure 5.14 development of external environment – weak external demand may hinder successful recovery of the labour Labour Force Demand and Supply market. (thousands) Although growth is predicted in the coming years in 1200 the EU, it is yet not expected that growth rates in the Labour supply nearest years might return to the pre-crisis level. Labour demand Moreover, the development of the Greek debt crisis brings even more uncertainty into the growth prospects 1100 of the EU countries, especially countries of the euro area. Additional risks are created by further development of the geopolitical situation that is the result of the events 1000 in Ukraine, as well as by weaker growth and the strengthening of protectionism of Russia, which is the second largest sales market for the Latvian products 900 following the EU. At the same time, Latvia’s internal challenges are mainly related to the gradual drop in the population numbers (especially of working age), as well as to general 800 labour force ageing trends. 2000 2004 2008 2012 2016 2020

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According to the forecasts of the Ministry of proportion of elderly people in the population will Economics, the population numbers of working age continue to grow in the future. (aged 15 to 62) will drop by more than 10% by 2030, Overall, by 2030, these trends will aggravate the compared to 2014. At the same time, the demographic problem of insufficiency of labour force which may load will increase by about 1/5. Significant changes are strengthen the formation of different disproportions in expected in the age structure of the population – the the labour market.

5.4 Employment Policy

The quantitative target set by Latvia in the context of The main factors motivating people to return to implementing the Europe 2020 Strategy is to reach an Latvia are the possibilities of finding a job and the employment rate of 73% (see Section 6.1) by 2020 in the amount of remuneration. However, other circumstances age group of 20-64. To reach this target, policy directions related to social security, everyday life, child education, are planned for both the labour supply and labour etc. are equally important. Ensuring a stable economic demand. growth, new jobs, and increased wages are the main The key elements of the employment policy of Latvia: preconditions for reducing emigration flows and – fostering labour demand – stimulating economic promoting the return of nationals residing abroad. activities and entrepreneurship, including labour It should be noted that the Re-emigration Support tax reduction, combating undeclared employment, Measure Plan for 2013-2016 has been drawn up at the state-provided indirect and direct support initiative of the Ministry of Economics, and it provides measures for entrepreneurs, measures to eliminate for ensuring support to nationals who are willing to or administrative barriers, implementing support have already decided to return to Latvia (see Box.5.1). measures for micro-enterprises, business The support measures provided for in the plan mainly incubators, etc. (see Sections 6.7 and 6.8); envisage: – strengthening labour supply – improving the – to provide information and consultations to competitiveness of the unemployed and persons people who consider the possibility of returning at risk of unemployment on the labour market, to Latvia, to strengthen the ties with the nationals including improving skills according to labour residing abroad; market demands, lifelong learning arrangements, – to provide practical support and reduce difficulties consultations on business start-ups, etc.; that the nationals of Latvia and their families face – fostering the match between labour demand and upon returning to and settling in Latvia. labour supply, including improving the educational system, involving employers’ The arrangements included in the Re-emigration organisations in improving education quality, Support Measure Plan embrace different areas, thus a forecasting the conformity of labour demand and wide range of institutions has been involved in the supply, educating the labour market participants, implementation of the plan. The Ministry of Economics including pupils and students, about the labour coordinates the implementation of the plan – regularly market and career issues. summarizes the information provided by the responsible authorities regarding fulfilment of the arrangements Demographic trends show a decline in the working- under their competency, as well as organizes meetings age population in Latvia and, therefore, the issues of with the representatives of the institutions and NGOs labour force availability (see Section 5.3) will become involved to discuss the identified problems and to try to increasingly topical in the upcoming years along with the find solutions. It should be noted that the most growing economy and its changing structure. The labour significant obstacle for successful implementation of the demand increases along with the improving economic plan is a lack of funding for the measures. In total, 1.6 situation, and some fields already are faced with shortage million euro have been allocated additionally from the of specialists. In the future, labour force shortage might state budget for the implementation of different become a factor impeding the growth. It may give rise to measures from 2014 to 2016. However, this is three times the need for attracting foreign labour force. The objective less than the estimated amount. Therefore, according to of Latvia is to fill in the vacant positions with the Latvian the information provided by the institutions, several nationals who have left the country instead of immigrants measures are implemented partially or are not from other countries. Therefore, the migration policy implemented at all.1 The key issues to be solved in should encourage people and their families living in a country other than Latvia for various reasons, but are willing to return to their home country to either live and work in Latvia or develop business ties with Latvia, for instance, to start their own business (the re-emigration 1 Review on Implementation of Re-emigration Support Measures of May 2015. Available at: https://www.em.gov.lv/lv/nozares_politika/reemigraci policy). jas_atbalsta_pasakumi/

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relation to the implementation of the re-emigration – provision of support measures to pupils in the support measures: educational establishments in Latvia, including – establishing the one-stop agency principle individual classes, improvement of the providing consultations and information to people professional qualification of teachers, availability planning to return to Latvia, as well as helping re- of information to the parents of pupils, etc. emigrants to integrate in the Latvian society; – ensuring the support (material help for moving to – improvement of portal www.latvija.lv to ensure Latvia) to repatriates and their families who have convenient access for the nationals residing been living abroad for at least 10 years. Since the abroad to the information about the possibilities funding was not allocated, the Draft Repatriation to live, work, start entrepreneurship in Latvia, as Law drawn up by the Ministry of Internal Affairs well as about the services provided by the (submitted to the Saeima on 11 March 2015) does government and local governments – regular not envisage any changes as to the persons eligible updates of information, adding of the services to receive the material support. provided by the local governments, etc.;

Box 5.1.

The Re-emigration Support Measures Plan for 2013-2016 In August 2012, a working group was established for the development of a re-emigration support plan at the initiative of the Minister for Economics aimed at covering a wide range of re-emigration issues and promoting the co-operation between the institutions involved in the process, as well as identifying the existing measures and developing new ones to create favourable conditions for re-emigration. The working group involved representatives from state and local government authorities, trade unions, organisations of entrepreneurs and the Latvian organisations abroad. The proposals of the working group for re-emigration support measures were passed on for public discussion held in November 2012 on the public online discussion platform www.musuvalsts.lv. After evaluating all of the received proposals by the working group, the Ministry of Economics prepared the Informative Report on the Proposals for Re-emigration Support Measures (approved by the Cabinet of Ministers on 29 January 2013) reflecting re-emigration support measures for creating favourable conditions for re-emigration proposed by the working group. In 2013, the Ministry of Economics in co-operation with the involved institutions continued to work on specific re-emigration support measures incorporated in the Re-emigration Support Measure Plan for 2013-2016. The plan was approved at the sitting of the Cabinet of Ministers on 30 July 2013. The Plan is aimed at supporting and assisting the nationals of Latvia living abroad and their families who are considering the possibility or have already decided to return to and work in Latvia, or want to establish their own company or develop business ties with Latvia. The plan is not aimed at encouraging all nationals of Latvia living abroad to rush back to Latvia without carefully considering the situation of employment and wages here. Neither is the plan aimed at proposing solutions to all problems of economics, society and the state in general neglected for years in Latvia. The plan includes 33 measures according to following eight directions of support measures: – ensuring the one-stop agency principle – providing information and consultations, also remotely, about moving to and residing in Latvia, helping to understand the required steps in various public authorities to the nationals of Latvia living abroad or their family members; – access to the labour market information – improvement and promotion of the CV/Vacancies database of the State Employment Agency; the CV/Vacancies database contains comprehensive latest information about the specialists needed/ vacancies in Latvia, etc.; – attracting highly skilled workers – support for attracting highly skilled specialists (attraction of scientists and academics livingabroad) to promote the return of highly skilled youth who have acquired education abroad, to revise the requirements and the list of occupations where the state should repay study loans for persons working in these occupations, etc.; – learning the Latvian language – provide support for Latvian language learning after returning to Latvia to all family members of the Latvian nationals, developed Latvian language learning materials, including electronic learning aids; – expanding co-operation with the diaspora (developing and maintaining business ties) – measures to inform the diaspora members about the latest developments in Latvia and support for entrepreneurs, consultations on business start-up possibilities, etc.; to gather information about entrepreneurs and professionals of the Latvian diaspora abroad and promote their involvement in the development of the national economy of Latvia; collect and share experience stories about returning and co-operation with the diaspora, etc.; – support to pupils returning to/integrating in the education system of Latvia, as well as their parents – improving and expanding the existing support mechanism for pupils returning from abroad, provided adaptation measures for pupils in education establishments; – promoting the accessibility to public authorities andstate enterprises – promoting transparent personnel selection procedures, including assessing the justification of requirements (for instance, foreign language knowledge) for candidates and their suitability for job duties, as well as providing an opportunity for those living abroad to have job interviews (in public administration institutions) through Web communication options; – expanding the range of persons eligible to apply for the status of a repatriate, so that the persons who have left the country after 4 May 1990 and have been living abroad for at least 10 years would be eligible to obtain the status of a repatriate (a draft Repatriation Law has been developed and submitted to the Saeima).

The plan also envisages the necessary funding for the implementation of the measures, sources of financing, the expected result- based indicators, deadlines for the implementation of measures, as well as responsible and involved institutions.

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Apart from this, the issue related to the improvement − to improve the efficiency of the analysis of the of the diaspora policy, as well as improvement of labour market situation; supervision and coordination of both policies (diaspora − to improve the cooperation mechanism to ensure and re-emigration) should be solved as a complex. better results in the labour market; In early 2014, a group of researchers from the − to increase the competitiveness of job seekers, University of Latvia initiated the implementation of ESF improving the knowledge and skills necessary for project Emigrant Communities of Latvia: National Identity, the labour market; Transnational Relations, and Diaspora Politics. The aim of the − to increase the opportunities of the registered project was to analyse the diversity of migration unemployed to become self-employed and to processes and provide substantiated information to engage them in entrepreneurship; policy makers to strengthen the Latvian diaspora, as well − to promote improvement of workplace quality. as to provide support to the nationals willing to return to Latvia.1 At the end of the project (in August 2015), the Promotion of the environment supporting the results will be reflected in the report, which will be employment is planned to be ensured by developing a presented to the responsible institutions. Based on the labour taxation and allowances system friendly to results of the research, it is envisaged to evaluate the inclusive employment. diaspora and re-emigration policies and the measures The State Employment Agency (SEA) is the implemented, as well as to prepare proposals for further institution implementing the state policy in the area of actions. unemployment reduction and support to the unemployed The state employment policy is targeted at creation of and job seekers. For influencing the labour market, it an inclusive labour market. In May 2015, the Cabinet of uses both active and preventive labour market measures, Ministers approved the Guidelines for Inclusive thus promoting competitiveness of the target group in Employment 2015-2020. The aim of the guidelines is to the labour market. promote development of the inclusive labour market on The key target audience of the employment measures the basis of the potential of the inhabitants of Latvia, implemented by the SEA are the unemployed people reducing the social consequences caused by registered with the SEA. Although some measures are unemployment, supporting return of jobless people to targeted for other groups of persons, overall, its activities the labour market and maintaining the groups at risk of are aimed at providing service to the unemployed. social exclusion into the labour market as long as The dynamics of the registered unemployment rates possible, as well as improving the quality of work places. complies with the economic growth rates in the country. Focusing on the necessity to reduce long-term Over the past few years, the number of the unemployed unemployment, they set the aim to decrease the level of people registered with the SEA and the registered the long-term unemployment to 15% of all unemployed unemployment rate has been dropping steadily (see and to 2.5% of the economically active population by Section 5.1). 2020 and in the long term further on. The funding for active labour policy measures is The measures are planned within the framework of related to the unemployment situation. As the number of three key directions. unemployed people decreases; the same trend is observed In order to promote inclusive labour market, it is in the funding allocated to the active labour policy planned: measures. − to expand provision of services to registered Figure 5.16 unemployed according to their individual needs identified in profiling; Funding of Active Labour Market Policy Measures − to increase the intensity of use of career services (million EUR) in the process of career planning; − to increase the involvement of the unemployed 100 from the risk groups in the labour market, finding solutions for the most significant reasons of unemployment; − to develop social entrepreneurship; 75 − to increase regional mobility to promote the increase of economic activity. 50 In order to promote balanced labour market, it is planned: − to expand availability of the information regarding 25 labour market activities;

0 2008 2009 2010 2011 2012 2013 2014 1 The information on the project and its interim results are available at http://migracija.lv/

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More than 2/3 of the total funding are provided by During the years of economic growth, the demand the European Union Social Funds. for active employment measures decreased, however, in In 2014, the most part of the financing was used for 2009, it increased considerably due to the significant rise training-oriented measures (professional training, in unemployment. The demand remained at a high level retraining and increasing the qualification, acquisition of in the following years, though it has started to drop. informal education, lifelong learning for the employed). Education programmes offered to the unemployed Analysing the structure of financing, it is evident that within the training measures are selected according to the 44% of it is used for increasing and improving the proposals of the Training Commission or upon a written qualification of unemployed, 29% – for the support of request of the employer. unemployed persons at the most unfavourable situation A limited number of labour market measures can be and development of grant-aided work places, including used to reduce the mismatching labour market by initiatives of young people and implementation of Youth professions. Out of all the implemented measures, the Guarantee. The share of financing used for paid measure Professional Training, Retraining, and Promotion of temporary public work is 21%, for increasing of the Qualification can be used directly to reduce the qualification of employed persons and entrepreneurship mismatching labour market. Within the framework of the initiatives – 6% of the total funding. measure, the unemployed have an opportunity to obtain

Currently, the SEA is implementing the following active new professional knowledge, thus acquiring or improving professional qualification. Currently, the unemployed are employment measures: offered to acquire knowledge only for medium-level – professional training, retraining, and promotion of qualification. qualification, acquisition of non-formal education; The rest of training measures can be considered as – measures to improve competitiveness; support for obtaining additional knowledge to improve – paid temporary public work (in 2010 and 2011 competitiveness in the labour market. Informal education this measure completely replaces the measure programmes are aimed at both the unemployed and job Work practice with a grant); seekers. Yet, lifelong learning measures for employed – measures for business or self-employment start- persons are aimed at employed people over the age of 45 ups; years (on certain conditions persons aged 25 to 44 years), – measures for specific groups of persons; except for public civil servants. – complex support measures; The SEA implements preventive unemployment – promotion of regional mobility of persons reduction measures: employed by merchants; – career consultations; – training at the employer (the measure will be – training programmes for involvement of adults in resumed in 2015). lifelong learning. Figure 5.17 Career consultations is the most important preventive Persons Involved in Active Employment Activities* unemployment reduction measure in terms of the (thousands) number of clients whom the service has been provided to. In 2014, career consultation services were provided to 300 45.6 thousand people, 39.7 of them were unemployed and job seekers, while in the first quarter of 2015 – 12 thousand, 10.4 thousand of them were unemployed or 225 job seekers. A training-oriented measure Training Programmes for Involvement of Adults in Lifelong Learning was launched in 150 2010. The target group includes employed and self- employed persons (except for employees of the public civil service) who have reached the age of 45, but have not reached the age for granting the state old age pension 75 (on certain conditions persons aged 25 to 44 years). In 2014, 8474 persons started training (including 5405 transferred from 2013). 0 Adapting to the changes in the labour market, a 2008 2009 2010 2011 2012 2013 2014 number of new active labour market measures have been * one person may be involved in several activities launched in 2014.

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The Unemployed Profiling System developed in the The social dialogue is important in implementing previous year started its operation. The system is the employment policy. The Employers’ Confederation envisaged for the work with the unemployed to provide of Latvia and the Free Trade Union Confederation of customized services to each unemployed. The profiling Latvia are involved in improving the social dialogue at promotes efficient and targeted application of the SEA national, regional and sectoral level. In the partnership, services to reduce the period of unemployment for a other partners are involved too, including local person and to eliminate the potential risks that might governments of Latvia, and the Latvian Association of impede successful return to the labour market. At the end Local and Regional Governments. of 2014, almost all registered unemployed people (97 per An important aspect is safety at work, ensuring cent) had been profiled. conditions for safe and healthy work environment. The measure Training Programmes for Involvement of To improve working conditions and reduce accidents Adults in Lifelong Learning was completed in 2014. As from at work and vocational diseases, the EU Occupational the launch of the measure in 2010, 28 thousand Safety and Health Strategic Framework 2014-2020 has employed persons were involved in it. been developed. The new strategy was published by the Particular attention is paid to the promotion of the EC in June 2014. The main tasks at the EU level are: employment of young people. After interruption of five – to improve the implementation of the current years, pupils’ employment in summer employment requirements for safety and health protection at measure was resumed. Thus, pupils have an opportunity work in the Member States, particularly focusing to acquire first professional skills and an insight into their on the ability of micro-enterprises and small future professional choices. enterprises to implement useful and efficient Using the state support, pupils aged 15 to 20 measures for elimination of risks, attending general, special or vocational education – to improve preventive measures related to institutions may work during their summer holidays. occupational diseases, paying particular attention Within the measure, a pupil's salary is covered by the to the existing, new and potential risks, state in the amount of 50% of the monthly minimal – to take into account ageing of the EU labour salary in the state. force. In 2014, the opportunity to work was taken by 4.3 thousand pupils. In 2015, it is planned to involve 3.5 According to the said tasks, it is planned to draft thousand pupils in this measure. Guidelines for Work Safety Policy in Latvia 2015-2020. To reduce youth unemployment, Latvia actively Reduction of administrative burden in the area of participates in the implementation of the EC safety at work is continued in Latvia. initiative Youth Guarantee. The measures to implement In 2014, the requirements for working at height and youth guarantees in Latvia are planned to take place from the equipment for persons who work at height have been 2014 to 2018. The total funding for the implementation improved, the working conditions will be improved and of youth guarantees measures is 66.7 million euro. safer environment will be ensured, thus reducing the risk The youth aged 15 to 24 years who are not working of accidents. The new requirements came into force on 1 or studying will be eligible for the necessary support in a September 2014. form of labour, training or education measures. Several In July 2014, the Cabinet of Ministers approved the measures are offered to the youth aged 13 to 15 years and improved labour security requirements in construction. 25 to 29 years. It is established that a youth of the target Latvia has a relatively high rate of undeclared group within the guarantee is eligible to receive support employment in certain sectors that increases unfair for inclusion in the labour market not later than four competition and reducesthe social security of employees. months after abandonment of studies or obtaining the In the developed policy planning documents, the status of an unemployed. measures to reduce undeclared employment were In 2014, 24,445 young people got involved in the implemented in the following key directions: initiative Youth Guarantee, but in the first quarter of 2015 – effectivization of the control mechanism for undeclared 7,021. employment; reduction of unfair competition; revision of In total, 4.7 million euro were used for the activities the penalties policy with regard to undeclared within the measure Youth Guarantee, 4 million euro of employment; informing and educating society about the which were co-financing of the EU Funds. negative consequences of undeclared employment. A Consulting Board of the Youth Guarantee measure The key directions of combating shadow economy implementation was established in July 2014 in order to and ensuring fair competition were tax policy, reducing promote cooperation and provide proposals for efficient the administrative burden, supporting honest implementation of measures and their improvement. entrepreneurs, and promoting a transition to legal economy, improving the capacity of controlling institutions, elaborating regulatory enactments, penalties policy, work with society, and eliminating shadow economy in risk sectors.

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Understanding the need for the continuation of The indicators of participation of adults in the resolving these issues, in autumn 2014, the government lifelong learning1 have been dropping over the past few established a high-level Shadow Economy Combating years. In 2014, 5.3% of inhabitants aged 25 to 64 were Council headed by the Prime Minister. The Council involved in the lifelong learning. consists of ministers, heads of involved institutions, and The lifelong learning principle is implemented in social partners. The functions of the Council are to several directions: coordinate the development of draft policy planning – promoting cooperation and ensuring coordination documents on combating the shadow economy and to between partners involved in the education of coordinate and improve co-operation in combating the adults; shadow economy in order to ensure the effectiveness of – developing a national qualification framework the said activities. structure, and adjusting its levels to the European

The education system plays an important role in the qualification structure; context of labour market development, particularly – ensuring the evaluation of knowledge, skills, and emphasising the significance of lifelong learning. The professional competence acquired outside the introduction of the lifelong learning principle is formal education; emphasised also in the National Reform Programme of – offering a second chance education as a Latvia for the Implementation of the Europe 2020 Strategy. compensating mechanism to reduce the number Latvia has committed to foster continuous of early school leavers; improvement and development of knowledge, skills, and – supporting qualification improvement of competences of the population by providing the employees according to employers’ requirements availability of lifelong learning to ensure that 15% of the that are necessary for the training of employed population (aged 25-64 years) are continuously involved within the framework of the sectors. in educational process in 2020. The dynamics of the lifelong learning lately evidences that the activities in the area of education of adults need to be more purposeful.

1 The source of data – Survey of Labour Force by the CSB. The indicator is included in the EU structural indicators, and it describes the participation of adults aged 25 to 64 in the activities of the lifelong learning.

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6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY

6.1 Europe 2020 Strategy and National Reform Programme of Latvia

6.1.1 Europe 2020 Strategy and its Progress On 5 March 2014, the EU published a communication called Taking stock of the Europe 2020 strategy for smart, sustainable and inclusive growth. The aim of On 3 March 2010, the EC published a the communication is to take stock of the first results and communication, Europe 2020: strategy for smart, sustainable lessons learned in the first four years of the and inclusive growth, which laid down the Commission’s implementation of the Europe 2020 strategy, and to vision of the Europe 2020 strategy. express an opinion about the future Europe 2020 On 17 June 2010, the European Council officially strategy. To identify and collect opinions of all interested approved the Europe 2020 strategy and its principal parties, the EC initiated a public consultation according elements: EU-level quantitative targets for 2020, Integrated to the Communication in the period from 5 May to guidelines (drafted according to Articles 121 and 148 of the 31 October 2014. The EC is planning to prepare a mid- Treaty on the Functioning of the European Union, which term review of the Europe 2020 strategy by the end contains key economic and employment policies, and of 2015. forming the basis for the development of national reform A European Semester has been conducted annually programmes for EU Member States), and agreed that EU since 1 January 2011 to evaluate the economic situation Member States in co-operation with the EC should in the EU as a whole and in EU Member States, as well develop national reform programmes and submit them to as to propose recommendations to EU Member States the EC by the end of April 2011 along with their Stability for the implementation and strengthening of their or Convergence programmes (drafted and implemented to economic policies. fulfil the requirements of the Stability and Growth Pact). The Europe 2020 strategy and national reform Monitoring of the implementation of the Europe 2020 programmes of EU Member States and Stability or strategy consists of two pillars (see Figure 6.1) – Convergence programmes are the main elements in the macroeconomic and thematic monitoring (national coordination and monitoring of economic policies of EU reform programmes for the implementation of the Member States at the EU level within the European Europe 2020 strategy of EU Member States and their Semester (see Figure 6.2). Multilateral monitoring of both compliance with the Integrated guidelines are evaluated), as programmes is performed at the EU level, based on well as fiscal monitoring (Stability or Convergence programmes which the EC may give a policy warning if the economic of EU Member States and their compliance with the policy of any EU Member State fails to comply with the Stability and Growth Pact are evaluated). EU Integrated guidelines and objectives set at the EU level. Figure 6.1 The national reform programmes are linked to the EU budget because a part of the measures are co- Surveillance Mechanism for National Reform financed from the EU budget. Programmes and Stability or Convergence Programmes In 2015, several innovations were introduced into the of EU Member States European Semester process to make it more efficient and to allow more time for discussions between all Quantitative targets of Europe 2020 strategy stakeholders. The first innovation concerns faster Integrated guidelines of Stability and publication of the Commission Staff Working Document Europe 2020 strategy Growth Pact which includes a Country Report, and also an In-Depth Macroeconomic Coordination of Fiscal Review on the Prevention and Correction of Macroeconomic monitoring thematic areas monitoring Imbalances, if macroeconomic imbalances are found. These Commission documents evaluate the progress Stability or National National reform Convergence achieved by EU Member States in addressing the level programmes programmes country-specific recommendations issued by the EU Council and in the correction of macroeconomic Commission Annual Growth Survey Annual recommendations imbalances. Commission Staff Working Documents for EU EU´s flagship initiatives and support pillars EU Member States were published on 26 February 2015. level (i.e., internal market, trade and internal policy, The second innovation is related to faster publication of EU financial support) an EC recommendation for country-specific

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 94 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY recommendations issued by the EU Council. The EC to the EC their comments on the draft EC recommendation for country-specific recommendations recommendation for country-specific recommendations. issued by the EU Council was published on 13 May 2015. In 2015, unlike in the previous years, EU Member States The third innovation concerns the time and the deadline, were given ten days to do so. by which EU Member States have to prepare and submit Figure 6.2

European Semester: Partnership between the EU and Member States

November- September– March April May June July February October

Commission Staff Annual Working Growth Document for European Survey and Publication of EU level each Member Commission Alert recommendations review State (reform Mechanism programme and Report imbalances) European Discussion of Approval of Council / Discussions recommendations recommendations Council European Discussions Parliament Approval and submission of national reform programmes and National Member Stability or level States Convergence decisions programmes to the European Commission

The EC’s Annual Growth Survey is an important Box 6.1). As a result of these discussions EU Member element in the European Semester process, because its States agree on key economic policy priorities to be taken publication starts discussions in different EU Council into consideration when updating national reform formats at the beginning of the European Semester (see programmes, Stability or Convergence programmes.

Box 6.1

Annual Growth Survey 2015 The EC published its Annual Growth Survey 2015 on 28 November 2014 along with other important documents, namely, the Alert Mechanism Report, the Joint Employment Report, and the report on the legal framework of the Stability and Growth Pact (“six-pack” and “two-pack”). The Annual Growth Survey 2015 reviews the economic and social situation in Europe and sets political priorities for the EU as a whole. This is the start of a new European Semester of economic policy coordination which ensures the coordination of economic policies between EU Member States to promote growth and jobs. The EC believes that, in order to help Member States to return to higher growth levels and make progress towards sustainable development, structural, fiscal and monetary policies have to be combined in an integrated, growth-friendly approach, acting both on the demand and supply sides of our economies. This requires action at all levels of government from global to EU, national, regional and local levels. Thus, the Commission recommends three main pillars for the EU’s economic and social policy in 2015: – A coordinated boost to investment: The EC is putting forward an Investment Plan for Europe which should mobilise at least EUR 315 billion of additional public and private investment over the period of 2015–2017 and improve significantly the overall investment environment. – A renewed commitment to structural reforms: The EC notes that progress at national and EU level in areas like services, energy, telecoms and the digital economy, as well as in improving conditions for business creates new opportunities for jobs and growth. Therefore, cutting down bureaucracy at European and national levels as a part of the Better Regulation Agenda is essential to creating the right regulatory environment and promote a climate of entrepreneurship and job creation. – Pursuing fiscal responsibility: The EC notes that Member States still need to secure long term control over deficit and debt levels. Fiscal policies should be differentiated, depending on the situation of each country. Member States with more fiscal space should take measures to encourage domestic demand, with a particular emphasis on investment. Moreover, the quality of public finance should be raised by improving expenditure efficiency and prioritising productive investment in government spending, by making the tax system more efficient and supportive of investment. It is also noted that addressing tax fraud and tax evasion is essential to ensure fairness and allows Member States to collect tax revenues due to them.

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New monitoring rules for economic and fiscal (using the scoreboard created by the alert mechanism) policies (also known as the 'six-pack') consisting of five and correct macroeconomic imbalances (such as a high regulations and one directive entered into effect on current account deficit, etc.) — see Box 6.2. Since the 13 December 2011. The adoption of these new rules in national reform programmes of EU Member States focus the EU created a macroeconomic imbalances procedure on the implementation of key structural reforms, this (in addition to the existing excessive budget deficit helps to promptly prevent excessive budget deficits and procedure), the purpose of which is to timely identify macroeconomic imbalances.

Box 6.2

Alert Mechanism and Scoreboard Every year, the EC publishes an Alert Mechanism Report that analyses the situation in EU Member States based on set indicators and their thresholds: – three-years current account balance rolling average% of GDP with a threshold at +6% of GDP and -4% of GDP; – net international investment% of GDP with a threshold at -35% of GDP; – five-years percentage change in country’s global export market share with a threshold at -6%; – three years’ percentage change in one unit labour costs with a threshold at +9% for Eurozone countries and of +12% for non- Eurozone countries; – three-years percentage change in consumer price index-adjusted real effective exchange rate compared to other 35 industrialised countries with a threshold at +/-5% for Eurozone countries and of +/-11% for non-Eurozone countries; – private sector debt with a threshold at 160% of GDP; – credits issued to the private sector debt with a threshold at 15% of GDP; – annual change in house prices compared to the Eurostat consumption deflator with a threshold at 6%; – government debt with a threshold at 60% of GDP; – three-years unemployment rate rolling average with a threshold at 10%; – annual change in total financial sector liabilities with a threshold at 16.5%.

If the situation in any EU Member State exceeds the threshold set for any indicator, the Commission should carry out an in-depth analysis and publish an In-depth review. In its Alert Mechanism Report 2015, the EC identified 16 EU Member States which need an in-depth analysis. For the EU Member States that benefit from financial assistance (such as Greece and Cyprus), the monitoring of their imbalances and monitoring of corrective measures takes place in the context of their programmes. For the other EU Member States, the EC did not at this stage carry out further analyses in the context of the Macroeconomic Imbalances Procedure. The EC is of the view that the macroeconomic challenges of the Czech Republic, Denmark, Estonia, Latvia, Lithuania, Luxembourg, Malta, Austria, Poland and Slovakia do not represent imbalances causing macroeconomic imbalances. At the same time, the EC points out that careful monitoring and policy coordination are necessary on a continuous basis for all EU Member States to identify emerging risks and propose the policies that contribute to growth and jobs.

6.1.2 National Reform Programme of Latvia scenario of the Latvian economy, as well as targets of the Sustainable Development Strategy of Latvia – Latvia for the Implementation of the Europe 2020 2030, and also reflect the National Development Plan 2014- Strategy 2020 (“NDP2020”), which was approved by the Saeima on 20 December 2012. The National Reform Programme of Latvia for According to the quantitative targets of Latvia, the the implementation of the Europe 2020 strategy plans for 2020 are to achieve an employment rate of 73% (NRP of Latvia) was approved by the Cabinet of in the population aged 20-64, to increase investments in Ministers on 26 April 2011 together with the Convergence research and development (R&D) to 1.5% of GDP, to Programme of Latvia 2011-2014. Both programmes were increase the share of the population having acquired submitted to the EC on 29 April 2011. tertiary education to 34-36%, to reduce the share of early The NRP of Latvia describes the medium-term school leavers to 10%, to reduce the share of persons at macroeconomic scenario, main macro-structural risk of poverty to 21%, to increase the share of renewable bottlenecks of Latvia and key measures to eliminate energy sources in gross energy consumption to 40%, etc. them, as well as national targets of Latvia for 2020 in the According to Section 6.1.1, one of innovations of the context of the Europe 2020 strategy and key measures to European Semester in 2015 was related to the publication achieve them. of the Commission Staff Working Document for EU Member States, which reflects the EC’s evaluation of the progress Latvia’s aim is to promote growth and jobs by made in addressing the country-specific ensuring the growth of GDP in the medium term by 4- recommendations issued by the EU Council. Having 5% and a high employment rate of 73% by 2020. evaluated the progress made by Latvia in addressing the The NRP of Latvia reflects quantitative targets of country-specific recommendations issued by the Latvia for 2020 in the context of the Europe 2020 EU Council, the EC admitted that there was just some strategy (Latvian quantitative targets). They have been set progress (see Box 6.3), although Latvia had slightly taking into account the medium term development exceeded the EU average recommendation

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 96 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY implementation progress indicator compared to other EU Member States.

Box 6.3

Commission Staff Working Document 2015 – Country Report for Latvia 26 February 2015 was the first day in the European Semester’s practice that the EC published a Commission Staff Working Document which includes a Country Report, and also an In-Depth Review on the Prevention and Correction of Macroeconomic Imbalances, if macroeconomic imbalances are identified, for each EU Member State. The Commission Staff Working Document Country Report Latvia evaluates the Latvian economy taking into account the Annual Growth Survey which was published in November 2014 and started the European Semester of 2015. In line with the Investment Plan for Europe, the Country Report for Latvia also explores ways to maximise the impact of public resources and unlock private investment. The Report also reviews the policy response since mid-2014, notably as regards the achievements of the country in the implementation of the country-specific recommendations issued by the EU Council in 2014. According to the EC’s evaluation, the Country Report for Latvia also provides that, overall, Latvia has made some progress in addressing the recommendations, which, according to the evaluation score introduced by the EC, means that the EU Member State has informed about activities or has started activities to address the recommendations. The Country Report of Latvia also identified problems and challenges: – labour tax reforms are not sufficiently targeted at reducing the high tax burden on low-income earners. Shifting of the tax burden away from labour towards property and environment taxes will have a potential to support a growth-friendly tax shift away from labour taxation; – the credibility of the medium-term budgetary plans is hampered as revenue and expenditure measures are not explained. The lack of clarity on revenue plans affects timely decision-making on spending priorities and progression of structural reforms; – there is room for improvement of the supply of skills to increase labour productivity. Higher education suffers from inadequate public funding and a lack of impartial study field accreditation. There is a lack of attractiveness in vocational education and apprenticeships. Inadequately concentrated public funding for internationally competitive institutions negatively affects research and innovation system outcomes. – important challenges include the capacity of the social safety net, access to healthcare for vulnerable groups and a sufficient labour supply. The social safety net is not sufficiently strong, pension adequacy is at risk and the financing and coverage of active labour measures is inappropriate. On health, waiting times for diagnostics are high, there is a lack of sickness prevention and health promotion, and the health care workforce strategy is not yet implemented; – for the full opening of the gas market from April 2017, regulatory and ownership issues would need to be settled over the coming months, in order to ensure predictability and a smooth transition. Implementation of the EU energy efficiency scheme relies on rolling out ambitious energy efficiency projects in buildings, heating systems, and low-carbon transport; – time needed to resolve administrative, civil and commercial cases is excessively long. The role of the Judicial Council in implementing judicial reforms is not strong enough. The state-owned enterprise management reform is not complete, a public administration reform is not planned, and the capacities of the Competition Council are not sufficiently strong.

According to the progress of the European Semester, guidance, institutional and financial independence of the the Cabinet of Ministers approved the fourth Progress Competition Council. The European Commission and Report on the Implementation of the NRP of Latvia Latvia also discussed further steps in the implementation and the Latvia’s Stability Programme for 2015-2018 on of the European Semester 2015. 13 April 2015. Both documents were submitted to the Based on the Commission Staff Working Documents EC. published in 2015 for EU Member States, having evaluated The Progress Report on the Implementation of the the updated National reform programmes, Stability or NRP of Latvia contains an updated medium-term Convergence programmes, which were submitted by EU macroeconomic scenario described in the NRP of Latvia, Member States, and the progress in their implementation, evaluates the progress of Latvia in addressing the on 13 May 2015, the EC presented a recommendation recommendations issued by the EU Council in 2014, for Council Country-specific recommendations for gives a detailed description of NRP policy directions, EU Member States, including Latvia. After discussions including national quantitative targets of Latvia in the in various EU Council formats, these recommendations context of the Europe 2020 strategy, and reflects will be approved in the EU Council in July 2015. information on the use of EU funds. According to the Commission’s recommendation, the

It should be noted that the National Reform Programme following recommendations are made for Latvia for of Latvia and the Stability Programme of Latvia are being 2015-2016: implemented in close co-operation with the EC. The – Ensure that the deviation from the medium-term progress of the implementation of both programmes is objective in 2015 and 2016 is limited to the discussed regularly in bilateral dialogues. For example, allowance linked to the systemic pension reform. a bilateral dialogue between Latvia and EC – Improve vocational education and training, speed representatives was held in Brussels on 24 April 2015. up curriculum reform and expand apprenticeship During the bilateral dialogue, they discussed Latvia’s offer. Ensure that the new financing model of the plans concerning shifting of the tax burden away from higher education system rewards quality. Better labour towards consumption, property and environment target research financing and incentivise private taxes, funding and availability of health care, career

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investment in innovation on the basis on of the Council recommendations to Latvia are a vital Smart Specialisation Framework. element when setting national priorities, formulating the – Take concrete steps to reform social assistance, necessary reform and policy activities, as well as ensuring adequacy of benefits, and take measures successfully implementing National reform programmes of to increase employability. Reduce the high tax Latvia and Latvia’s Stability Programmes. In the view of the burden for low-income earners by shifting the tax scale, impact, implementation costs of individual burden to other sources less detrimental to recommendations (e.g., concerning reforms in education, growth. Take action to improve accessibility, cost- research, healthcare) and the need to discuss them with effectiveness and quality of the healthcare system representatives of social partners, non-governmental and link hospital financing to performance organisations and the community, it is unlikely that they mechanisms. can be implemented within one year.

– Improve efficiency of the judicial system, by The Ministry of Economics will continue to monitor increasing accountability of all parties (including the implementation of the activities addressing the NRP insolvency administrators), by providing adequate of Latvia and Council recommendations, and the means to fight tax evasion and by strengthening information on progress in the implementation of these the role of the Judicial Council. Improve the activities will be included into the Progress Report on the public service legislation to strengthen the conflict Implementation of the National Reform Programme of Latvia of interest regime and link remuneration to within the Europe 2020 strategy for 2016. responsibilities.

6.2 Inclusion of Latvia into the EU Economic and Structural Policies

6.2.1 Use of the European Union's Breakdown of the funding of a total of 4.53 billion euro of the EU funding between the OPs in the 2007- Structural Funds and the Cohesion Fund 2013 programming period: – 1. OP Human Resources and Employment (ESF) – Being an EU Member State, Latvia benefits from 583 million euro. 653 million euro together with financial assistance coming from the EU structural funds ancillary liabilities; (SF) and the Cohesion Fund (CF), which are tools for the – 2. OP Entrepreneurship and Innovations (ESF) – implementation of the EU’s regional cohesion policy. 696 million euro. 833 million euro together with

2007-2013 Programming Period ancillary liabilities;

In the 2007-2013 programming period, the CF – 3. OP Infrastructure and Services (ERDF+CF) – support was primarily intended for education of the 3.2 billion euro. 3.4 million euro together with population, technological excellence and flexibility of ancillary liabilities. enterprises, and development of science and research in Figure 6.3 order to foster the creation of a knowledge-intensive economy in the country and to strengthen other Breakdown of the Funding between the Operational necessary prerequisites for sustainable economic Programmes in the 2007-2013 Programming Period development and human life in Latvia as a whole. (per cent) The programming of SF and CF funds is carried out on three levels: the EU level strategy or the Community Strategic Guidelines, the Member States’ strategy or the Human National Strategic Reference Framework (NSRF) and the Resources Member States’ Operational programmes (OP). and The NSRF, on which the allocation of the SF and Employment CF funding of 4.53 billion euro available to Latvia in the 11% 2007-2013 programming period is based, was approved Infrastructure by the Cabinet of Ministers on 19 June 2007. The and Services Commission approved it on 20 September 2007. 72% Based on the decision of the EU Council of Ministers on the multiannual financial framework for the 2007- Entrepreneurship 2013 programming period, Latvia received 4.53 billion and Innovation euro for the implementation of cohesion policy 17% objectives through the EU funds (the European Regional Development Fund – ERDF; the European Social Fund – ESF) and the CF.

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Table 6.1

Financial Progress of the EU Funds in the 2007-2013 Programming Period until 31 March 2015

Funding from Repayments received from EC Concluded agreements Paid to beneficiaries EU fund (including advances) million euro million euro % million euro % million euro %

ESF 583.1 644.3 111 607.1 104 553.9 95 ERDF 2407.6 2576.0 107 2108.3 88 2006.6 83 CF 1539.8 1521.1 99 1276.3 83 1238.1 80 Total 4530.5 4741.4 105 3991.7 88 3798.6 84

105% of projects for the funding from the EU funds euro have been concluded by 31 March 2015. available to Latvia in this entire programming period have 3991.7 million euro have been paid to beneficiaries by been approved and agreements for a total of 4741 million 31 March 2015.

Box 6.4

Activities within the Competence of the Ministry of Economics in the 2007-2013 Programming Period 741.4 million euro of the EU funds are available for the activities of the Ministry of Economics in the 2007-2013 programming period, which break down as follows: 1. OP Human Resources and Employment – 50.9 million euro; 2. OP Entrepreneurship and Innovations – 474.4 million euro; 3. OP Infrastructure and Services – 216.1 million euro.

Agreements Concluded within the Activities Supervised by the Ministry of Economics by 31 March 2015: – 30 agreements for a total contract amount of 31.6 million euro were concluded within the activity Support for Employee Training to Foster Competitiveness of Undertakings – Support for Training Organised in Partnerships. – 84 agreements for a total contract amount of 2.7 million euro were completed within the activity Support for Individual Training Organised by Undertakings. – 6 agreements for a total contract amount of 6.4 million euro were concluded within the activity Support for Creation of Jobs. – 3 agreements for a total contract amount of 143.6 thousand euro were completed within the activity Attraction of Highly Qualified Employees. – 6 agreements for a total contract amount of 53.17 million euro were concluded within the activity Competence Centres. – 8 agreements for a total contract amount of 2.2 million euro were concluded within the activity Technology Transfer Contact Points. – 80 agreements for a total contract amount of 7.1 million euro were concluded within the activity Development of New Products and Technologies. – 116 agreements for a total contract amount of 37.8 million euro were concluded within the activity Introduction of New Products and Technologies in Production. – 3 agreements for a total contract amount of 0.07 million euro were concluded within the activity Development of New Products and Technologies – Support for Strengthening of Industrial Property Rights. – 21 agreements for a total contract amount of 0.2 million euro were concluded within the activity Programme for Development of New Products and Technologies of Micro, Small and Medium-Sized Enterprises. – 215 agreements for a total contract amount of 210.1 million euro were concluded within the activity High Value Added Investment. – 2615 agreements for a total contract amount of 14.53 million euro were concluded within the activity Entering into Non-Domestic Markets – External Marketing. – 2 agreements for a total contract amount of 18 million euro were concluded within the activity Entering into Non-Domestic Markets – Strengthening of International Competitiveness of Industries. – 1298 projects of starters for over 24.7 million euro were supported within the activity Support for Starting Self-Employment and Business. – The following results were achieved within the financial instruments implemented within the activity Investment Fund: 1) venture capital – an agreement on the creation of a venture capital fund was concluded with BaltCap Management Latvia on 22 January 2010. In addition to 20 million euro invested by the Investment Fund, BaltCap Management Latvia also invested 10 million euro co-funding from private investors. BaltCap Management Latvia concluded 12 venture capital investment agreements for 15.2 million euro by 31 March 2015; 2) seed and initial capital – an agreement on the creation of a seed and initial capital fund was concluded with Imprimatur Capital Baltics on 16 June 2010. The funding available for total seed and initial capital investments is 9.5 million euro (an agreement was concluded with Imprimatur Capital Baltics on 10 May 2013 to increase the seed capital investment to 6.4 million euro). By 31 March 2015, Imprimatur Capital Baltics concluded 54 seed capital investment agreements for 5.2 million euro and 9 initial capital investment agreements for 4.1 million euro; 3) high-risk loans – agreements with AS “Swedbank” and AS “SEB Banka” were concluded on 26 March 2010. The programme had been implemented until 26 September 2012. 18 loan agreements for 68 million euro were concluded within the programme;

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Box 6.4 continued

4) microloans – two microloan funds started their operations in August 2014: Capitalia and Grand Credit. 33 agreements for 0.5 million euro were concluded within the programme; 5) growth capital instruments – three new growth capital instruments started their operations in 2013: ZGI Capital, EXPANSION Capital, FLyCap. 33 agreements for 10.3 million euro were concluded within the programme. – 274 credit guarantee agreements for a total amount of 104 million euro and 159 agreements on export guarantees for a total amount of 14.8 million euro were concluded within the activity Guarantees to Improve Enterprise Competitiveness. On 30 May 2013, LGA started granting guarantees to housing insulation projects. By 31 March 2015, 45 guarantees for a total of 6.1 million euro were granted for housing insulation projects. – 122 mezzanine loans for a total amount of 28.7 million euro were granted within the activity Mezzanine loans. – 158 loans for a total amount of 78.6 million euro were granted within ERDF part of activity Loans to Improve Competitiveness of Enterprises. – 1 agreement for a total amount of 2.85 million euro was concluded within the activity Activities for Raising Motivation for Innovation and Starting Business. 40,929 persons were involved in the events, seminars and contests organised within the activity. – 15 agreements on provision of business incubation services in the Latvian regions and 2 agreements on provision of business incubation services to enterprises in creative industry in Riga were concluded within the activity Business incubators. 603 undertakings received support in business incubators within the activity. – 101 contracts for a total amount of 7.4 million euro were concluded within the activity Support for Investments for Micro, Small and Medium-Sized Enterprises in Special Assisted Areas. – 11 agreements for a total amount of 4.6 million euro were concluded within the activity Cluster Programme. – 21 agreements for a total amount of 9.8 million euro (ERDF) were concluded within the sub-activity Preservation, Renovation of National Level Urban Building Monuments and Adjustment of Infrastructure for Development of Tourism Products. – 7 agreements for a total amount of 5.2 million euro (ERDF) were concluded within the sub-activity Development of a National Level Bicycle Tourism Product. – 859 agreements for a total amount of 75.5 million euro (ERDF) were concluded within the sub-activity Activities to Improve Heat Insulation of Multi-Apartment Buildings. – 55 agreements for a total amount of 5.2 million euro (ERDF) were concluded within the sub-activity Activities to Improve Heat Insulation of Social Residential Buildings. – 134 agreements for a total contract amount of 57 million euro (CF) were concluded within the activity Activities to Increase the Efficiency of Centralized Heat Supply Systems. – 10 agreements for a total amount of 28.8 million euro (CF) were concluded within the sub-activity Development of Cogeneration Plants Using Renewable Energy.

Absorption of the Funding from the EU Funds Education Programmes and Support for Optimisation of the by the OPs Human Resources and Employment, Network of Vocational Education Institutions. Entrepreneurship and Innovations and Figure 6.4 Infrastructure and Services Overall, 7.4 thousand agreements on the Financial Investments from the EU Funds by 31 March implementation of projects for 5.3 billion euro, i.e. 2015, Total Public Funding 106.8%, were concluded for 5 billion euro of the public (million EUR) funding available for the implementation of projects of the EU funds, which include the funding from the Public funding available EU funds and state budget and the local government 5367 budget co-financing (the funding for ancillary liabilities at 404.5 million euro granted from the state budget not included). 4.3 billion euro or 87.2% were paid to Projects approved 5300 beneficiaries. If we select only the funding from the EU funds, the total amount of concluded contracts is 4750.7 million Agreements concluded euro or 104.9% from the funding available from the 5294 EU funds. This means that contracts are being concluded for already granted amount of ancillary liabilities. Payments made to beneficiaries In the area of entrepreneurship and innovations, 4327 projects are moved from the OP Infrastructure and Services (urban environment area) to the OP Entrepreneurship and 0 2000 4000 6000 Innovations (entrepreneurship and innovations area). In the area of education, the scope of funding has been updated according to actual costs of completed In the area of science, the scope of funding has been projects in the activities Modernisation of Equipment and updated according to actual costs of completed projects Improvement of Infrastructure for Implementation of Vocational in the activity Support for Science and Research.

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Figure 6.5 In the environment area, the amount of funding for selection round 2 projects was updated in the activity Information on Concluded Agreements in Industries by Creation of Infrastructure in Natura 2000 Areas. When 31 March 2015, Funding from the EU Funds updating costs of construction works and having found a (million EUR) significant non-compliance in costs of construction works with the calculations provided in the project Transport 1241 application, the Nature Conservation Agency revoked the only project application submitted for selection round 3 Environment 716 because the project had become more expensive. Entrepreneurship and 589 innovation In the area of employment and social services, large- scale amendments were made to sub-activity Training of Education 503 the Unemployed and Job-Seekers, taking into account the Employment, social 379 inclusion savings which occurred during the implementation of the project. Urban environment 283 In the energy area, 14 projects were suspended by the Science 253 end of 2014 in sub-activity Activities to Increase the Efficiency of Centralized Heat Supply Systems. Health 231 In the ICT area, a decrease in the number of ICT 184 concluded agreements is anticipated taking into account that, when evaluating the feasibility and eligibility of Energy 176 expenses of the project Development of Portal www.skolas.lv Support for management 111 (round 2), the CFCA found that the objective of the of EU funds project has not been achieved and made the decision to 49 Culture apply a financial adjustment in the amount of 100% from Administrative capacity 22 eligible costs of the project. Overall, the implementation of financial 15 Tourism instruments does not reach the desirable indicators. 0 500 1000 1500 Investments, loans actually paid and guarantees issued to undertakings within the OP Entrepreneurship and Innovations by 31 March 2015 make 106.3 million euro or 72.1% of the funding available from the EU funds. The funding for the OP Human Resources and Employment has been used in the amount of 10.4 million euro, which is the entire funding available from the EU funds. Figure 6.6

Fulfilment of Objectives of Implementation of Financial Instruments in Sub-activities (cumulatively by 31 March 2015, funding from the EU funds, million euro)

Mezzanine loans and security guarantees for the 4.2 improvement of competitiveness of economic operators 4.0 Planned up to 31 March 2015

1.3 Support in the form of loans to improve competitiveness of Payments made, investments/issued enterprises 3.2 guarantees from 1 January to 31 March 2015

Investment Fund for investments into guarantees, subprime 11.7 loans, venture capital funds and other types of financial instruments 7.9

1.4 Support for starting self-employment and business 2.3

0 3 6 9 12

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The most significant deviations from the target are On 6 November 2014, the Cabinet of Ministers observed in the activities Investment Fund for the Investments received a draft order on the composition of the in Guarantees, High-Risk Loans, Venture Capital Funds and Monitoring Committee (MC) for the 2014-2020 Other Financial Instruments – in high-risk funds, the ZGI-3 programming period of the EU funds which entered into target as at 31 March 2015 was achieved at 37.9%, the force on 21 November 2014; therefore, the MC for the target of BALTCAP was achieved at 36.5%. In the seed 2014-2020 programming period of the EU funds instrument – Imprimatur and in the start-up capital officially started to perform its job duties, including instrument – Imprimatur the target has been overachieved. monitoring of the efficiency of use of the funding from Overall, progress is being observed in the the EU funds, the progress of the implementation of implementation of financial instruments, although new projects and the compliance with approved programming growth risk capital funds need large-scale investments documents, as well as taking decisions related to the within a comparatively short period of time. It is implementation and monitoring of the EU funds. important to emphasise that the number of deals under The OPs were prepared based on principles such as examination and the quality of business products coherence with the EU 2020 and other programming significantly improved in the last quarter which will have documents, a strategic vision which is based on the a positive effect on the allocation of funding from the analysis of shortages and needs, on efficient, sustainable EU funds. development and result-oriented solutions. The priority

2014-2020 Programming Period axes and specific objectives defined in the programming The Commission officially approved the OP Growth documents focus on the achievement of specific results and Employment for the 2014-2020 programming period of with the maximum pay-off for economic development the EU funds on 11 November 2014. and contributing to the achievement of objectives of the Cohesion policy. Table 6.2

Breakdown of the Funding from the EU Funds and Total Investments in the 2014-2020 Programming Period in the OP Growth and Employment (the European Commission Officially Approved it on 11 November 2014) Scope of Structure of EU Total scope of EU funding, funding, funding, million euro % millions euro

Strengthening research, technological development and innovation 467.5 10.8 550.0 Enhancing access to, and use and quality of, information and communication technologies 172.8 4.0 203.3 Improving competitiveness of small and medium-sized enterprises 314.3 7.3 369.7 Supporting the shift towards a low-carbon economy in all sectors 480.6 11.1 565.4 Protecting environment and facilitating efficiency of resources 623.1 14.4 733.0 Facilitating sustainable transportation and eliminating deficiencies in the main network infrastructures 1159.8 26.9 1364.4 Promoting employment, supporting labour mobility and social inclusion 164.4 3.8 188.3 Investing in education, skills and lifelong learning 934.5 21.6 1099.4 Total 4316.9 100 5073.6

The new 2014-2020 programming period of the Several important steps in the development of EU funds will provide our country the possibility to programming documents for the 2014-2020 receive and invest 4.4 billion euro in the development programming period of the EU funds have been made. and growth of Latvia and its population. Latvia will be The Law on Management of the EU Structural Funds and the the fourth largest net beneficiary among all other Cohesion Fund in the 2014-2020 Programming Period entered Member States and will receive about 3000 euro per into effect on 11 July 2014, as well as the development of capita from the EU budget in the 2014-2020 period. the rules of the specific objectives which need to be Latvia’s target in the next programming period is to get started as soon as possible continues. closer to the level of welfare of the EU, using the Inter-institutional agreements have been concluded opportunities provided by the EU funds wisely and with the Ministry of Transport on cooperation in the responsibly. 2014-2020 programming period within 6.1.5 SAM The development of a supplement to the OP Growth Reconstruction and Increase of Carrying Capacity of Dressing of the and Employment was completed on 30 April 2015 to add Main National Roads, 6.1.3.SAM Providing Necessary more details to the OP. Infrastructure on Riga’s Main Flyovers and Eliminating

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Fragmentary Nature of the Main Roads and 6.3.1.SAM and Increase of Carrying Capacity of Dressing of the Main Increasing Regional Mobility by Improving the Quality of Regional National Roads and 6.3.1.SAM Increasing Regional Mobility by Roads. The monitoring of these SAM projects has started Improving the Quality of the Regional Roads, which should be (procurement plans were evaluated, preliminary started as soon as possible, started in January 2014; inspections of procurements were carried out, first failure to adhere to the budget can be explained by the inspections at project sites were carried out, there was long coordination of these regulations, taking into communication with the responsible authority and the account that parallel coordination of the OP Growth and implementers of projects in relation to identified gaps Employment with the Commission is ongoing and there and risks in eligibility of costs). were discussions between state administration authorities In their projections made in August 2014, the regarding the form of regulation of the implementation responsible authorities planned costs for a total of of SAM, which should be started as soon as possible. The 53.2 million euro. The plan was to use most of the Ministry of Welfare and the Ministry of Health also planned funding for the SAMs supervised by the Ministry planned to use 5.5 million euro for guarantees for young of Transport which address national and regional road people and 0.5 million euro for the development of improvement activities – 47.1 million euro. 8.5 million, or health guidelines, respectively. The Ministry of Welfare 18.1% of this amount, have been allocated by the end of used 4.7 million or 85.5%, but the Ministry of Health the year. Although the coordination of the regulations used 0.2 million euro or 40%. regarding the implementation of 6.1.5.SAM Reconstruction

Box 6.5

Activities within the Competence of the Ministry of Economics in the 2014-2020 Programming Period 764.15 million euro in EU funds are available for the activities of the Ministry of Economics in the 2014-2020 programming period, which break down as follows: 1. Innovation – 193.5 million euro; 2. Fostering competitiveness of small and medium-sized enterprises – 237.1 million euro; 3. Energy efficiency and energy – 333.6 million euro.

Innovation: Innovation vouchers – 7 million euro. Technology transfer – 49.5 million euro. Competence centres – 102.3 million euro. Motivation for innovation – 4.8 million euro. Training for the unemployed – 29.9 million euro.

Fostering competitiveness of the small and medium-sized enterprises: Availability of financing – 61.4 million euro. Contributing to awareness of Latvia as a travel destination and attraction of events – 20 million euro. Entering into non-domestic markets – 31.8 million euro. Risk capital – 45 million euro. Business incubators – 31 million euro. Development of industrial areas – 21.7 million euro. Cluster programme – 6.2 million euro. Technology accelerators – 20 million euro.

Energy efficiency and energy: Energy efficiency in residential buildings – 150 million euro. Energy efficiency in public buildings – 97.8 million euro. Energy efficiency at industrial sites – 32.55 million euro. Centralised heat supply systems – 53.2 million euro.

The work on matters of the management and control ensure functions defined for the 2014-2020 system in the 2014-2020 programming period is ongoing: programming period of the EU funds and – a draft description of the management and control monitoring mechanisms for the SAM’s system has been developed and sent to the bodies responsible authorities, which, according to the involved in the management of the EU funds to decision made by the Cabinet of Ministers, has to get recommendations and comments; be submitted within three months after the – the Risk Management Strategy for Bodies Involved in the Commission’s approval for the OP Growth and Management of the European Social Fund, the European Employment is received; Regional Development Fund and the Cohesion Fund in – the work is ongoing on the creation of a Cohesion the 2014-2020 Programming Period has been Policy Unified Information System (CP UIS), incl. an developed; expert working group for CP UIS has been – the work is ongoing on the preparation of a created, tests of the project application form in communication on necessary human resources to the electronic environment have started, meetings

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were organised with holders of public registers – improvements to the ICT and transport (Register of Enterprises, State Land Service, State infrastructure, which directly affect the Regional Development Agency) on cooperation in productivity of the economy, serve as a basis for exchange of information available in the registers innovations, and increase the internal and external of these authorities. mobility of persons and goods.

The most significant investments of the 2014–2020 programming period of the EU funds are planned for the 6.2.2 Foreign Economic Policy following objectives: – reduction of the number of residents at-risk-of- Bilateral Economic Co-operation poverty by providing respective training, To foster and deepen bilateral economic co-operation improving their health conditions and integrating with the most important trade partners, Latvia has them into the labour market; concluded bilateral economic co-operation agreements – promotion of employment by integrating the with Russia, China, Belarus, Ukraine, Kazakhstan, long-term unemployed and young people into the Azerbaijan, Georgia, Moldova, Uzbekistan, Kyrgyzstan, labour market; Turkmenistan, Tajikistan and Armenia. – decreasing primary energy consumption by Intergovernmental commissions for economic, scientific improving energy efficiency of private and public and technical co-operation matters (IGC) and United buildings, improving energy efficiency in Committees (UC) were formed within these agreements, manufacturing and supporting increase in energy with the aim to activate bilateral co-operation in various efficiency for public transport; areas and to search for opportunities to improve further – increase in investments into research and co-operation. Therefore, Latvia has concluded a development by fostering raising of private Declaration with Turkey on the establishment of the investments, as well as cooperation between United Economy and Trade Commission. research institutions and businessmen;

Box 6.6

Bilateral Economic Co-operation of Latvia in the First Half of 2015

Latvia-Georgia On 8–9 January 2015, the Prime Minister of Georgia came on an official visit to Latvia. During this visit, the Minister of Economics participated in the Prime Minister’s meeting with the Georgian delegation, which included the Georgian Vice Prime Minister, Minister of Economic and Sustainable Development, Minister of Foreign Affairs, as well as Minister on European and Euro-Atlantic Integration. During the meeting they discussed economic co-operation and possibilities of its extension. On 15–17 April 2015, the President of Georgia came on an official visit to Latvia. Several ministers and vice-ministers, as well as a small delegation of businessmen accompanied the Georgian President on his visit. A Latvian-Georgian business meeting was organised during this visit. It was attended by representatives of Latvian companies, from sectors such as education, healthcare, pharmaceuticals, tourism, logistics, territory improvement, marketing, industry of arms, production of transport systems, etc.

Latvia-Finland On 28–29 January 2015, the Minister of Economics visited Finland within the framework of the visit of the Latvian President. A Latvian-Finnish business forum was held during this visit. It was attended by more than 80 Latvian businessmen, representing sectors such as transport and logistics, metalworking, chemistry and pharmaceuticals, food processing, construction, wood processing, education, tourism, etc. Panel discussions with experts in the sectors of education and tourism were also held during the visit, for the discussion of prospects for further co-operation in the area of education, as well as the future and competitiveness of the travel and tourism industry. Moreover, during the visit, the Minister of Economics met the Minister of Economics of Finland, to discuss bilateral economic co- operation between Latvia and Finland, the co-operation in the energy sector of the two countries, as well as the latest news on the Latvian Presidency of the Council of the European Union. The Minister also met the Head of the Property Rights Management Department of the Cabinet of the Prime Minister of Finland, the Minister for International Development of Finland, to discuss issues in managing capital companies. Alongside to this visit, Days of Latvia were held in Finland for the first time from 15 January until 15 February, in order to promote the awareness of the Latvian products already present in the Finnish market, to widen access for new producers, as well as to introduce the population of Finland with the rich Latvian culture and art. During the Days of Latvia, the people of Finland could see products of Latvian interior and fashion designers, there was an exhibition of cartoons, demonstration of documentaries, presentations of Latvian literary works, master classes of Latvian chefs, etc.

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Box 6.6 continued

Latvia-Norway On 18–19 March 2015, the Minister of Economics visited Norway within the framework of the visit of the Latvian President, who was also accompanied by a large delegation of businessmen. During the visit, a seminar on Norwegian economics and business culture was organised for the delegation of Latvian businessmen. There was also a Latvian-Norwegian business forum, which was attended by 57 Latvian businessmen from sectors like the wood processing, transport and logistics, food processing, chemistry and pharmaceuticals, metalworking, construction, education, IT, agriculture, etc. The business forum was followed by bilateral meetings between Latvian and Norwegian businessmen. During the visit, the Minister of Economics met with the Norwegian Minister of Petroleum and Energy, to discuss co-operation in the energy sector, the development of legislation in the area of accessing underground resources, as well as matters of managing Norwegian state capital shares. The Minister also met the Norwegian Minister of Trade and Industry, to discuss the bilateral economic co-operation between Latvia and Norway and its prospects.

Latvia-Austria On 8-9 April 2015, the Minister of Economics visited Austria within the framework of the visit of the Latvian President, who was also accompanied by a large delegation of businessmen. A Latvian-Austrian Business Forum was held during the visit. It was attended by 33 representatives of Latvian companies, representing transport and logistics, metalworking and machinery, financial and legal services, food and beverages, construction, textiles and design, education, tourism and other sectors. In the course of the visit, the Minister of Economics met the Austrian Federal Minister of Science, Research and Economics, with whom she discussed matters of Latvian-Austrian bilateral economic relationship, latest news on the Latvian Presidency of the Council of the European Union and matters of dual education. Together with the Latvian businessmen, the Minister of Economics also visited an Austrian school of dual education, to gain insight into Austrian experience on better ways to combine the supply of vocational education institutions with the labour market.

Latvia-Italy On 10-12 June 2015, the Minister of Economics made a work visit to Italy. During the visit, the Minister participated in the opening of Days of Latvia in Milan. The purpose of this event was to further the bilateral economic relationship between Latvia and Italy, as well as to inform about investment and business opportunities in Latvia. The Minister also attended business seminars in Naples and Milan, and met with Italian officials and businessmen. A delegation of more than 10 Latvian businessmen, representing sectors such as transport and logistics, IT, financial and legal services, textiles, design, metalworking and machinery, participated in this visit.

In the first half of 2015, in order to promote the meetings with senior officials from Belarus, Germany, enlargement of economic co-operation, the Minister of China, United Kingdom, Georgia, Armenia, Sweden, Economics as well as businessmen have been on official Tajikistan, Japan, countries of the Eastern Partnership, visits to Finland, Norway, Austria and Italy, and senior etc. officials from the Ministry of Economics have held

Box 6.7

Latvia on Its Way to the OECD It is important for Latvia to become a member of the OECD, because Latvia will be able to take part in the process of developing new OECD’s recommendations and standards, Latvian experts will be able to share their experiences with OECD Member States, discussions, scientific research and the analysis of economic policies in the OECD will help Latvia to identify its economic priorities, potential problems and the best methods for resolving them. When Latvia joins the OECD, it will be included into OECD’s statistical databases and economic policy reports, which have gained a higher degree of trust from the foreign investors and businessmen. Latvia would have a higher OECD credit rating which would in turn make Latvia more attractive for investments, as well as facilitate access to credit markets for the funding of significant economic projects. The increased recognition of Latvia as an OECD Member State will help also the domestic businesses to conquer non-EU markets. It is important to actively participate in the work of this organisation at the expert level, in order to ensure the optimal active and qualitative participation in OECD committees, working groups and programmes. Today several OECD Member States admit that thanks to Latvia’s active work in the OECD, it is one of the most prominent candidates for accession.

According to the individual roadmap approved by the OECD, the process of accession of Latvia started at the end of 2013. When the OECD’s “roadmap” of Latvia’s accession negotiations was approved, the Initial Memorandum of Latvian accession negotiations was prepared and submitted to the OECD on 14 February 2014. In accordance to this memorandum, an in-depth evaluation of Latvia’s readiness to join the OECD has been started. It describes and arguments the degree to which Latvia meets OECD standards and best practices according to each (250) OECD instrument. Accession negotiations entail an evaluation by OECD committees (21 committees in total) on the compliance of active Latvian laws and regulations and their application to OECD’s legal instruments, as well as the best practices of OECD Member States. At the conclusion of the negotiations the commission will provide its official opinion, which will lay the foundation for the decision of OECD Member States, whether to invite Latvia to become a member of this organisation. Currently, most of the committees have completed their job on the provision of information on the situation in the specific sector in Latvia. Based on this information, the OECD Secretariat has started or — in the case of individual committees — has already prepared draft reports on the compliance of Latvia to OECD standards and best practices of Member States, as well recommendations for improvements in the area of specific policies.

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Box 6.7 continued

Concerning the competence areas of the Ministry of Economics, at the end of 2014, in Riga, the OECD has conducted research missions in areas of economy and development, public capital and privatisation practices, consumer protection policies, competition policies and statistics. In December 2014, the OECD distributed an in-depth report on the compliance of Latvia to OECD Guidelines on Corporate Governance of State-Owned Enterprises. The report will be included in the OECD Corporate Governance Committee’s final report, which will be discussed in October 2015. In February 2015, the OECD published the Economic Survey of Latvia. In April 2015, a meeting of the Committee on Consumer Policy was held in Paris. During this meeting, the OECD presented its Consumer Policy Report on Latvia. Representatives of the Ministry of Economics and the Consumer Rights Protection Centre informed about the OECD’s Draft revised 1999 e-commerce recommendation. In April 2015, the European Consumer Protection Conference was held within the Latvian Presidency of the Council of the European Union, in which OECD representatives presented the implementation of the Consumer Policy Toolkit for setting priorities.

In the first half of 2015, experts from the Ministry of Economics and its subordinate institutions participated in the meetings of the OECD Working Group on Privatisation and Corporate Governance of State Owned Assets, OECD Tourism Committee, Committee on Consumer Policy, Economic Policy Committee. According to today’s projections, technical negotiations might end by the end of 2015, and in 2016 Latvia might become a full member of the OECD.

Latvian Presidency of the Council of the Three priority axes were set for the Latvian European Union Presidency of the Council of the European Union: Each EU Member State holds the Presidency of the – a competitive EU as a basis for growth and Council of the European Union on a rotating basis and improvement of the quality of human life runs the work of the Council of the European Union for Latvia actively involved in the implementation of the six months. Latvia held the Presidency of the Council of EU’s growth and employment strategy, promoting the European Union in the first half of 2015. measures to increase competitiveness of the EU, as well The Presidency is implemented in co-operation with as developing a roadmap for coordination of the three Member States. The Presidency of three was started European Semester. Latvia’s priority was improvement of by Italy on 1 July 2014, Latvia followed in the first half of the business environment, incl. support to small and 2015, and Luxembourg will complete this presidency in medium-sized enterprises, creation of qualitative jobs, the second half of 2015. In 2014, Latvia, together with its availability of services and education, as well as fostering partner countries – Italy and Luxembourg, developed and of external competitiveness. Latvia hosted the approved their joint work programme. Whereas, Latvia’s Conference of EU-Asian Ministers for Education. (See individual six-month work programme was published on achievements of the Ministry of Economics in Box 6.8) 22 January 2015. During its Presidency, Latvia organised and ran about – reinforcement of the information society 1500 meetings in Brussels and Luxembourg. Latvia’s priority was EU’s actions in reducing the Representatives of ministries, their subordinate digital gap and creating an informed society. Latvia has institutions and the Permanent Representation of Latvia outrun many EU Member States in the area of to the EU were involved in the preparation and information technologies and digital solutions. In the first implementation of the Latvian Presidency. half of 2015, there was an active discussion on the The task of the Presidency was to be a fair and potential of digital economy to raise EU’s neutral mediator of negotiations. As the acting competitiveness compared to North American and Asian Presidency, Latvia co-operated with other EU Member countries. Latvia participated in the development of EU States, the General Secretariat of the Council of the policies updating the creation of the EU Digital Single European Union, the European Commission, the Market, e-management and improvement of e-skills of European Parliament and the President of the Council of the population, as well as information security in the the European Union. Latvia, as the acting Presidency, digital environment and matters of the freedom of represented the Council of the European Union in its Internet. During the Presidency, Latvia used the relationship with the Commission, and also represented opportunity to present its achievements in different the Council of the European Union outside the EU. formats, including e-management solutions and e- Latvia hosted about 200 meetings in an informal platforms for the promotion of civic participation. atmosphere, in order to contribute to the co-operation and to promote the decision-making process. The – reinforcement of the role of the EU on a National Library of Latvia was the main host institution global scale, formation of a welfare and in Latvia. About 25 thousand officials from other EU security space in the neighbouring regions of Member States visited Latvia. the European Union The Latvian Presidency proposed the following During the Latvian Presidency, special attention in values or 3i – Involvement, Growth and Sustainability this direction was focused on neighbourly relations of (Iesaistīšanās, Izaugsme, Ilgtspēja in Latvian). Europe, as it actively implemented the present policies

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 106 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY and initiatives in Eastern Partnership and Central Asian emphasis on the preparation of the EU-US Trade and countries already in 2014, both in regard to the economic Investment Partnership Treaty, as well as in the dimension, as well as by reinforcing democratic and framework of strategic partnerships of the EU, security processes. Latvia continued to support the promoting co-operation with Brazil, Japan, Russia, India reinforcement of transatlantic ties, with a special and China.

Box 6.8

Achievements of the Latvian Presidency in the Areas of Competence of the Ministry of Economics: Energy: – Commencement of the process of creation of the Energy Union – on 6 February 2015, an agreement on the creation of the European Energy Union was reached at a high-level conference in Riga. On 25 February, the Commission presented its Framework Strategy for a strong Energy Union. On 5 March, the first discussion between European Energy Ministers was held. The discussion later contributed to the conclusions of the Council of the European Union of 19 March. On 8 June, European Energy Ministers approved Council’s Conclusions On the implementation of the Energy Union: empowering consumers and attracting investments in the energy sector. – On 15–16 April, an informal meeting of European Environment and Energy Ministers was held, where they discussed one of the aspects of the Energy Union — heat supply and air conditioning market barriers, centralised heat supply, availability of funding and existing regional co-operation framework, best practices, obstacles, and further co-operation potential. – On 29 May, there was a meeting of a high-level working group on the Baltic Energy Market Interconnection Plan — reform of the plan, new Memorandum of Understanding and Action Plan 2015–2020.

Competitiveness: – On 2 March, the Council of European Competitiveness Ministers adopted Council’s conclusions On EU Single Market Policy. – To contribute to the EU Digital Single Market Strategy, which was published on 6 May, on 3 March, ministers of the Council of European Competitiveness Ministers discussed possibilities of creating a true digital single market and the benefits of such a market for customers and enterprises across the EU. On 25–25 March, European Competitiveness Ministers had an informal meeting, where they held discussions and exchanged views in three discussion panels: Role of the EU Single Market in digital economy, Digital transformation of industry and Digital business. Furthermore, on 28 May, the Council of European Competitiveness Ministers discussed a new EU’s strategy for the digital single market. A summary of their opinions was included into Conclusions of the Council of the European Union on 25–26 June. – On 28 May, the Council of European Competitiveness Ministers reached a political agreement on a directive on package travel and assisted travel arrangements, which will significantly reinforce protection of consumer rights when purchasing travel services; – On 28 May, the Council of European Competitiveness Ministers adopted Council’s conclusions On digital transformation of European industry. – On 23–24 April the Ministry of Economics in co-operation with the Consumer Rights Protection Centre organised a Consumer Protection Conference. The international conference, which was devoted to the latest news in the area of consumer protection gathered together high-level policy makers in the area and consumer supervision authorities from the EU, EFTA Member States, OECD representatives, as well as representatives of European-scale consumer and business organisations, as a platform for exchange of views and best practices. The conference provided a possibility to discuss the development of consumer policy at the highest level, in discussing the priorities of the upcoming periods, listening to the views and examples of the best practices offered by the participants of the conference. – On 7 May, the European Competition Day conference was held. Broader opportunities for more effective protection of competition were a platform for discussing matters of competition policy, which are important for all EU Member States. Participants of the conference — EC’s representatives, leaders and experts of national competition supervision authorities, judges, academic teaching staff, representatives of non-governmental organisations and companies met, to share their experiences and exchange views, whilst jointly creating such a competition policy, which would protect the interests of EU’s population in the best possible way. – On 3–5 June, a European Standardization Summit was held in Riga. It gathered together high-level representatives from 33 European standardization organisations (CEN/CENELEC), international standardization organisations (ISO, IEC), 50 national standardization organisations, EC and international business environment. The summit provided a great opportunity to emphasise Latvia’s priorities and to answer the question, how standardization can promote a transfer to a cleaner and wiser economy. The summit’s main focus was the construction sector, which has a high economic value across the EU and is especially important for the Latvian community today. – On 15–17 June, the first conference of the Week of Innovative Business Financial instruments for innovation and business 2015 was held. The conference promoted understanding the potential of financial instruments of EU support funds and their availability, according to the EU’s science and research programme Horizon 2020 and the opportunities that this programme provides, for promoting the availability of funding for research, innovation and development of small and medium-sized enterprises. The conference especially targeted the interaction between financial tools Horizon 2020, COSME, European structural funds and investment funds (ESIF) and national and local level initiatives, as well as the use of other financial instruments on a national and local level. The event gathered policy makers, financial intermediaries, as well as representatives of science, innovation and business.

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6.2.3 European Union Single Market create barriers for the free movement of goods and the information society’s services. The process of coordination of technical regulations is carried out not The EU Single Market consists of 31 countries only by the responsible authorities of the EU Member (28 EU Member States and 3 countries of the European States, but also by any economic operator, who wants to Economic Area (EEA) – Norway, Iceland and become a part of it, by providing comments and Liechtenstein) – with over 500 million consumers. The objections, regarding the drafts prepared by other EU EU Single Market is a territory without internal borders, Member States, if these drafts might potentially affect where a free movement of goods, services and capital, that economic operator’s product export or cross-border and people is ensured. After a lengthy and coordinated provision of information society services. The work within the EU, unified principles and rules for information on draft technical regulations notified by economic operators have been developed, border control Member States is freely available in the database of the has been cancelled, a more competitive business Technical Regulations Information System (TRIS) environment has been created, consumers have been http://ec.europa.eu/enterprise/tris/lv/ where draft technical provided with a wider range of goods and services, new regulations can be viewed in Latvian. If any economic jobs are created, the people are provided the possibility to operator has any objections to draft technical regulations live, work and study in other Member States, a possibility of other countries, which might potentially or actually to introduce a single currency has been established, and affect sales of its product in the market of the respective many other benefits are ensured. EU country, the economic operator has the right to However, the potential of the EU Single Market is submit its objections to the responsible ministry, still not implemented to its full potential, and its competent to coordinate the respective policy area in improvement still continues, promoting a sustainable and Latvia. stable development of the EU’s economy, as well as The mutual recognition principle is a legal welfare of its population. mechanism to ensure free movement of goods in the By May 2015, Latvia’s transposition deficit of EU’s European Union. This principle, in fact, envisages that laws and regulations in the area of the EU Single Market destination Member States are not allowed to prevent was 0.7% (7 out of 1115 directives), thus Latvia remained sales of those goods in their territory, which are already in the group of Member States within the limits of the legitimately sold in another Member State, even if they EU average of 0.7 per cent. are produced according to requirements differing from Based on Article 34-36 and 49-62 of the Treaty on the the requirements of the destination Member State. This Functioning of the European Union (TFEU), the freedom of principle is applicable to goods, which are not subject to provision of goods and services and the right to do harmonised EU laws and regulations (free movement of business in Latvia is supervised and coordinated by the goods in a non-harmonised area). Ministry of Economics, which is constantly identifying To improve the application of the mutual recognition legal provisions as well as evaluating the laws and principle, the Regulation (EC) No 764/2008 of the European regulations, which are still in the drafting stage, that may Parliament and of the Council laying down procedures relating to potentially or actually hinder the implementation of the application of certain national technical rules to products freedoms of the EU Single Market. lawfully marketed in another Member State and repealing Decision Based on the Communication from the Commission No 3052/95/EC entered into effect on 2 September to the European Parliament, the Council, the European 2008. Its purpose is to define the procedure of Economic and Social Committee and the Committee of observation of the mutual recognition principle in the the Regions of 8 June 2012 Better Governance for the Single work of public authorities, as well as in communication Market, an electronic Single Market Centre was created with economic operators. Regulation 764/2008 also on the website of the Ministry of Economics obliges countries to create Product Contact Points (https://www.em.gov.lv/lv/eiropas_savieniba/es_vienota_tirgus_c (PCP). PCPs provide companies and responsible entrs/), which provides information on EU information authorities of Member States information on the and aid services. The main purpose of the EU Single regulations, which are applicable to a specific type of Market Centre is to help businessmen to use all the products, and information on any product type that advantages related to the EU Single Market, as well as to needs to receive permits before being placed on the provide practical assistance in relation to the limitations market. In Latvia, the Ministry of Economics fulfils on freedom of provision of goods and services. functions of a PCP (e-mail: [email protected]). From January The Ministry of Economics has also created an online until May 2015, the PCP responded to 9 information inquiry form, which enables reporting on barriers to requests from economic operators. business 24 hours a day (https://www.em.gov.lv/lv/ eiropas_ To ensure administrative co-operation between savieniba/zino_par_skersliem). EEA’s national regulatory authorities, the EC has created The technical regulations notification procedure an Internal Market Information System (IMI). The serves as a preventive, uniform and transparent IMI system allows contacting responsible authorities of monitoring tool, to evaluate and prevent the inclusion of the countries of the European Economic Area at such requirements into laws and regulations, which might national, regional and local level in a fast and effective

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 108 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY way. Using the IMI system, authorities of Members States public authorities, by incorrectly applying EU laws and can verify the information indicated in applications of regulations. In situations, when a resident or a legal entities and individuals, authenticity of documents businessman is harmed by the wrongful decisions taken issued in other Member States, and clarify other matters by the responsible authorities of other Member States, according to respective EU laws and regulations. Hence, the SOLVIT Centre acts as a free problem solution tool. the applicant is freed from bureaucratic barriers in the Every EU Member State (as well as Iceland, Norway and resolution of different cross-border matters in the EU Liechtenstein) hosts a SOLVIT Centre. The Latvian Single Market. The Ministry of Economics is the national SOLVIT Centre has received 7 complaints from January coordinator of the IMI system in Latvia. Today, the IMI until May 2015. To submit a complaint to the SOLVIT system in Latvia is operating in the sectors of Services Centre, the case must meet the following criteria: (1) the Directive (2006/123/EC), Professional Qualifications Directive decision has been taken by a public authority; (2) the (2005/36/EC), Posting of Workers Directive (96/71/EC), public authority is located in another Member State (a Patients' Rights Directive (2011/24/EU), Commission cross-border element); (3) EU’s legal norms (regulations, Implementing Decision on train drivers’ licences (2014/89/EU) directives, etc.) have been violated. The Latvian SOLVIT and Regulation on the cross-border transport of euro cash by road Centre most frequently solves cases reported by citizens, (1214/2011), and in the form of pilot drafts in the areas related to social benefits and the issue of residence of – Directive on the return of cultural objects unlawfully removed permits, and cases reported by businessmen, related to (2014/60/EU), E-Commerce Directive (2000/31/EC) and restrictions on freedom of provision of goods and Public Procurement Directive (2014/24/EU services, repayment of value added tax and recognition of and 2014/25/EU). The Services Directive obliges Member professional qualifications. States to inform about services which can cause To promote commercial activities and innovation in significant harm to human health, life and the the services sector, as well as gradual modernisation and environment, therefore, the IMI system has an Alert simplification of state administration, one of Latvia’s mechanism which ensures co-operation between priorities is promotion of freedom of provision of supervisory authorities for risk prevention. 77 responsible services. In co-operation with non-governmental authorities are registered in the IMI system in Latvia — organisations and national regulatory authorities, the 61 authorities are related with the area of services, 19 requirements of laws and regulations in the area of with the area of professional qualifications, 6 with the services, are regularly analysed and recommendations for posting of workers, 4 with the area concerning patients’ required changes, to reduce the administrative burden on rights, 2 with the area of e-commerce, 2 with train undertakings, are prepared. Administrative barriers and drivers’ licences, and 2 with the area of public procedures are reviewed, by respectively removing or procurement (one authority can be related to several simplifying requirements for the issue of permits areas). The introduction of Directive No 2013/55/EU into (licences, certificates, certifications and other documents), national laws and regulations must be completed by as well as creating the possibility to settle necessary 18 January 2016. It regulates the creation of a European procedures electronically. In addition, the implementation Professional Card in the IMI system, which will be of a one-stop shop principle continues, by improving the electronic and will be issued to those representatives of availability of services provided by public administration regulated professions who want to pursue the same in a Single Control Point — a single national and local profession in another EU Member State or a Member government services portal www.latvija.lv. State of the European Economic Area. Furthermore, a The “silence means consent” principle is one of the new tool is envisaged – an alert mechanism to inform all tools for promoting modernisation of public Member States about a professional whose pursuit on the administration to reduce delays in decision-taking by territory of that Member State of the following authorities, costs and unfavourable consequences to small professional activities in their entirety or parts thereof has and medium-sized enterprises. This principle suggests been restricted or prohibited in professions related to that in case a responsible institution fails to make a timely healthcare or child care or education. decision on the application for a permit, it shall be Within the five months of 2015, Latvia has sent considered that the service provider has received the 8 information requests to other Member States, within permit and is entitled to start service provision. The the IMI system: 4 in the area of professional Action plan for the implementation and application of the “silence qualifications and 4 in the posting of workers area; Latvia means consent” principle into administrative practices of responsible has received 57 information requests: 1 in the area of authorities was approved on 12 June 2012. It prescribes the services, 43 in the area of professional qualifications, 7 in initial implementation of the “silence means consent” the posting of workers area, and 6 in the area of patient principle for 15 services. The work on the rights. implementation of the principle continued and An alternative EU Single Market problem solution amendments to the Action Plan for Improvement of the network, SOLVIT Centre, created by the EC and Business Environment 2014-2015 were developed and Member States, has been operating in Latvia since 2004. adopted in May 2015, prescribing that the “silence means Its task is to find a fast and practical solution to the consent” principle will be implemented for 17 other problems of the EU Single Market caused by activities of services by the end of 2016.

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Latvia also participates in the frontrunners initiative. – recognition of professional qualifications to This initiative was started by national regulatory reduce the number of regulated professions and authorities of the United Kingdom, Denmark, Sweden remove barriers in the process of recognition of and the Netherlands, and today it already unites 16 EU professional qualifications in other Member Member States. The purpose of the frontrunner initiative States; is to resolve problems faced by businessmen and – reviewing regulations with regard to electronic consumers in the EU Single Market through co-operation trade, by identifying potential barriers for doing and exchange of best practices. The Member States co- business in the area of e-commerce, as well as operate in important areas such as: researching barriers in the process of registration – the creation of a Single Market Centre, so that of highest level domain names. businessmen would have a centralized access to information on EU Single Market’s help and Results of the above mentioned projects were information centres in one place; summarised and presented at the meeting of the Council – the development of single contact points in the of Competitiveness Ministers on 2 March 2015. area of services, where businessmen can settle all Additional areas in which Member States can co-operate necessary formalities to operate in the area of within this initiative are being identified right now. services, incl. in other Member States;

6.3 Industrial Policy

The framework of Latvian National Industrial Policy – low productivity and weak innovation (NIP) planning documents consists of a document performance; portfolio, the most important of which are the National – transformation of international business; Development Plan, Smart Specialization Strategy included in – demographics (aging of the labour force). the Science, Technology Development and Innovation Guidelines, Guidelines on National Industrial Policy, Education Development Taking into account the advantages and main Guidelines, and other sectoral policy planning documents. challenges of Latvian companies, the lines of action

Guidelines on National Industrial Policy established in the NIP are focused on the following: Latvian Guidelines on National Industrial Policy were – issues related to the availability and skills of the approved by the Cabinet of Ministers on 28 May 2013, labour force, such as implementation of further and they aim to promote the structural changes of reforms of the vocational education system and economy in favour of the production of goods and higher education system by consolidating and services with a higher added value, including an increase introducing vocational education programmes in the importance of industry, modernization of industry that meet labour market demands, as well as and services, as well as complexity of export. increasing the practical part of the programme; In order to achieve the objective defined in the continuing the use of state aid instruments aimed Guidelines, the following performance indicators to be at the improvement of the qualifications and skills achieved have been established: of professionals employed by a company, – the share of the manufacturing in GDP in 2020 – opportunities for retraining in specialities that are 20%; in demand in the market; reduction of the number – the growth in productivity of the manufacturing of students acquiring general secondary education in 2020 compared to 2011 – 40%; in favour of the vocational education system;

– the growth of the manufacturing in 2020 – issues related to the development of industrial compared to 2011 — 60%; zones, such as adaptation of the existing – investments in research and development – 1.5% industrial zones, improving the condition of roads of GDP. and utilities (electricity, water supply, sewerage, gas, lighting, etc.) to production facilities, creation To identify market shortcomings, the potential of of new industrial zones in the centres of the most exportable niches and products and services international, national and regional importance; with a higher added value was determined and an in- – issues related to the access to finance, such as depth analysis of producers was carried out, which led to providing the necessary funding to start-ups, the conclusion that the most important challenges of the micro- and small enterprises, providing support NIP to which government activities are to be directed for ensuring the operating capital or making initial are: investments, continuing the issue of loan – funding restrictions; guarantees, continuing the provision of corporate – labour costs and price competitiveness; income tax relief to encourage the production when acquiring new production equipment, creation of venture capital instruments that would

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stimulate investments in the development of planned within the framework of the EU programming businesses and expansion of their activities; period 2014–2020.

– issues related to the promotion of innovation, Smart Specialization Strategy such as increasing the research and innovation Smart Specialization Strategy provides for the capacity of economic operators, replacement of development of a vision, finding the competitive corporate income tax relief on research and advantages, choosing strategic priorities and a policy that development costs with a new incentive, maximally unleashes the regional potential of knowledge- establishing write-off of particular research and based development and thus ensures economic growth. development costs to the extent of triple the The strategy has been included in the Science, amount, development of the research base and Technology Development and Innovation Guidelines 2014–2020 excellence; and approved by the Cabinet of Ministers on

– issues related to the facilitation of export, such 28 December 2013 along with the adoption of the as supporting the cluster initiative, minimizing the Guidelines. risks of export transactions, entering external When developing a smart specialization strategy, it is markets and compensating certification costs; important to take into account the scenario of growth of

– issues related to the energy costs, such as national economy. When analysing the economic growth development of a support programme solutions of Latvia, it has been concluded that it is necessary to for increasing the energy efficiency and reducing promote the structural changes of economy in favour of emissions in the industrial sector. production of goods and services with a higher added value, including the increase in the role of industry, A plan of activities for the period of time until 2017 modernization of industry and services, as well as has been drawn up in compliance with the proposed lines development of complexity of export, for sustainable of action, providing a certain set of activities for each line growth of the economy. This is an essential prerequisite of action, determining the institutions responsible for the for the convergence of the Latvian economy with the implementation of activities, as well as defining the developed EU countries and for the growth of welfare of operational performance indicators to be achieved. the population that can be achieved by increasing the Within the framework of the action plan, the Ministry competitiveness of the Latvian economy that is based on of Economy has begun developing support measures innovation. Figure 6.7

Challenges of the Latvian Innovation System

Low productivity and A small share of the weak innovation manufacturing in the performance economy

Advantages of using Regionally cheap labour and mono-centric ENTREPRENEURSHIP resources development

Discrepancy between the Poor collaboration labour market demand between business and and supply science

A small number of Fragmented and people employed in degraded knowledge EDUCATION SCIENCE science, lack of renewal base

At the same time, while developing a smart defining the directions of economic transformation, specialization strategy, it is necessary to identify the directions of economic growth, and areas of smart existing problems of the innovation system (see specialization (see Table 6.3). Section 6.9). From the perspective of Latvian and EC To clarify the performance indicators for achieving export, there are eight main challenges in the Latvian policy objectives defined in the Smart Specialization Strategy innovation system depicted schematically in Figure 6.7. and areas of specialization, the Ministry of Economics, According to the analysis carried out, it has been Ministry of Education and Science and Ministry of identified that challenges can be found in all of the most Agriculture organized 14 public discussions where more important pillars of the innovation system. than 500 representatives of scientific institutions, Based on the conclusions and analysis, a framework educational institutions, and industry association took of the Smart Specialization Strategy has been developed part. The main conclusion — Latvian industry is

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 111 – characterized by high relative specialization, so the support of economic growth must be avoided — industry specialization as a whole is not a problem of the economic environment facilitating the economic activity Latvian economy. It was recognized that, when and the development of human resources must be implementing the Smart Specialization Strategy, one-sided ensured. Table 6.3

Framework of the Smart Specialization Strategy Directions of Economic Areas of Smart Priorities of Growth Transformation Specialization

1. Change of the Priority No 1: A more efficient use of primary products for the production of products production and export with a higher added value, creation of new materials and technologies and 1. Knowledge- structure in the diversification of use. More extensive use of non-technological innovation and the intensive traditional sectors of the potential of the Latvian creative industry for the production of products and services of bioeconomy economy a higher added value in the economic sectors. 2. Future growth sectors Priority No 2: The creation of an innovation system providing support for the where there are development of new products and technologies within the existing sectoral and cross- products and services sectoral frameworks, as well as new sectors with a high growth potential that is based 2. Biomedicine, with a high added value on the key technologies defining growth and provides an effective system for the medical or they may appear identification of new products/services, is able to find and support the creation of new technology, products within the existing sectoral and cross-sectoral frameworks, as well as to create biopharmacy and new industries with a high growth potential. biotechnology 3. Sectors with a significant Priority No 3: Increased energy efficiency, which includes the creation of new materials, horizontal impact and optimization of the production process, implementation of technological innovations,

contribution to use of alternative energy sources, and other solutions. economic Priority No 4: Development of a modern ICT system in the private and public sector that transformation 3. Smart meets today’s requirements. materials, Priority No 5: A modern education system that meets the requirements of the labour technology and market in the future and promotes the economic transformation and development of engineering expertise, entrepreneurial ability and creativity necessary for the implementation of the systems Smart Specialization Strategy priorities at all levels of education. Priority No 6: A well-developed knowledge base (fundamental science and scientific infrastructure) and human capital in the areas of knowledge where Latvia has comparative advantages and which are important for the process of economic 4. Smart energy transformation: areas of knowledge related to the areas of smart specialization, such as industry (1) knowledge-intensive bioeconomy, (2) biomedicine, medical technology, biopharmacy

and biotechnology, (3) smart materials, technology and engineering systems, (4) smart energy industry, and (5) ICT, as well as the key technologies identified by the EC (nanotechnologies, micro- and nanoelectronics, photonics, advanced materials and production systems, biotechnology). 5. Information Priority No 7: Identification and specialization of the existing resources of the territories, and proposing the prospective opportunities and directions of economic development, communication including the main and prospective business directions in the local government technologies territories.

In a number of discussions, improvement of often involved in production stages, where the added productivity was mentioned as the main objective. The value is relatively low, and one of the main ways of industry representatives see new products and increasing productivity in low- and medium-tech sectors improvement of the existing production techniques and is a gradual transition to high-tech industries and technology as a way of improving the productivity. products. It was also stressed that science requires Latvian companies have a relatively low productivity, and diversity of knowledge. Specialization for the needs of labour productivity in particular – in Latvia, specialisation the industry can be provided with operational focus on is carried out both in the production and service sectors dealing with specific problems, involving the with a low added value, while in sectors where the overall representatives of industries in the approval of research added value is above the average, Latvian companies are grants and projects.

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6.4 Energy Policy

The key directions of the efficient, well-balanced, – sustainable energy – reduced dependency on market-principle based energy policy of Latvia established imported energy resources, new and efficient by the informative report Long-term Energy Strategy 2030 – technologies for the use of renewable resources Competitive Energy for Society (Energy Strategy 2030) approved are encouraged, measures to improve energy by the Cabinet of Ministers in the meeting of 28 May efficiency are implemented. 2013 are aimed at the development of the state economy’s competitiveness promoting welfare of the Based on the energy policy development directions society. laid down in the Energy Strategy 2030, the Ministry of The main task of the Energy Strategy 2030 is to ensure Economics is developing new Energy Policy Guidelines for positive impact of the energy sector on the national 2014-2020, which will supersede the Energy Development economy of Latvia, at the same time striving to achieve Guidelines for 2007-2016, approved by the Cabinet of the security and sustainability of the energy supply: Ministers Decree of 27 June 2006. The guidelines will – secure energy supply – a stable energy supply and include measures to be implemented until 2020 to developed infrastructure provided to energy achieve the energy sector development objectives in consumers; Latvia.

Box 6.9

Energy Sector in Latvia Both the imported (natural gas, electricity, petroleum products, coal, coke, etc.) and local (hydropower, wind energy, firewood, charcoal, straw, other biomass, biogas, bioethanol, biodiesel, peat, used tyres, municipal waste for heating) energy resources are used in Latvia to supply fuel, electrical energy and heat to sectors of the economy, commercial consumers, and residents. A part of electricity is generated by Latvian HPPs, CHPs, biomass, biogas and wind power plants, whereas the rest is imported. The amount of produced electrical energy in Latvia depends on the flow rate of the Daugava and other rivers. Mainly, the local fuels – firewood – and imported fuel – natural gas – are used in heating energy generation. In 2013, the total volume of delivered electrical energy was 7,564 GWh that is by 3.7% less than in 2012. JSC “Latvenergo” produced 64.2% of the total amount of the delivered electrical energy in its plants, 17.9% bought from small producers of electrical energy, and the net imports of the electrical energy was 17.9%. In 2013, energy resource generation and recycled products in Latvia reached 89.8 PJ, but the import of energy resources was 169.9 PJ, out of which 58.4 PJ was the import of natural gas. The total consumption of primary energy resources in Latvia amounted to 187.1 PJ, which is by 1.8% lower than in 2012 (see table 6.5). In 2013, 41.2% of the total electricity consumption were used for end consumer services, 27.5% – for industry and construction, 27.1% – for households, 2.2% – for agriculture, and 1.9% – for transport.

Table 6.4

Electricity Supply in Latvia (GWh) 2000 2005 2009 2010 2011 2012 2013

Total electricity supply 5922 7053 7223 7500 7340 7859 7564 Gross electricity generation 4136 4905 5569 6627 6094 6167 6209 including: from renewable energy resources: 2824 3414 3555 3635 3078 4109 3534 large HPPs* 2794 3263 3391 3445 2823 3627 2852 small HPPs 25 62 66 75 64 80 60 biomass power stations – 6 4 9 13 65 215 biogas power stations – 36 44 57 107 223 287 wind power stations 5 47 50 49 71 114 120 from fossil energy resources: 1312 1492 2014 2992 3017 2059 2675 large CHPs** 1163 1278 1476 2402 2425 1409 1957 other CHP 149 214 538 590 592 650 718 Net electricity imports 1786 2148 1654 873 1245 1691 1355

* Daugava cascade – Riga HPP, Ķegums HPP, and Pļaviņas HPP ** Riga CHP-1 and Riga CHP-2, source: JSC “Latvenergo”

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Table 6. 5

Consumption of Primary Energy Resources in Latvia (PJ) 2000 2005 2009 2010 2011 2012 2013

Total consumption* 163.9 192.1 189.0 194.8 184.2 190.5 187.1 including: coal and coke 3.1 3.3 3.5 4.5 4.6 3.8 3.0 peat 2.5 0.1 0.0 0.1 0.0 0.0 0.0 petroleum products 56.4 61.9 62.4 64.6 59.5 58.4 59.3 natural gas 45.6 56.9 51.4 61.3 54.0 50.8 50.3 firewood 39.7 49.4 52.6 45.6 46.9 52.5 53.1 electricity** 16.6 19.9 18.6 16.0 15.1 19.8 15.8 other energy resources*** - 0.6 0.5 2.7 4.1 5.2 5.6

* Calculations for all energy resources are based on the lowest calorific value ** Hydropower, wind energy and electrical energy net imports *** Used tyres, municipal waste for heating, charcoal, straw, other biomass, biogas, bioethanol, biodiesel

Electricity Market like legal entities. The amendments to the Electricity The electricity market in Latvia is fully open as of 1 Market Law of 18 September 2014 further envisage January 2015. Pursuant to the amendments to the special tariffs for the protected consumers. Electricity Market Law of 18 September 2014, households Along with complete opening of the electricity market have an opportunity to freely choose the provider and as of 1 January 2015, a support instrument for protected agree on the electricity price based on an agreement just consumers was introduced (see Box 6.10).

Box 6.10

Social Support Instrument A protected consumer is a poor or low-income family (person) or a large family, using electrical energy in their household for personal needs (final consumption). In 2015, the support to the protected consumers will be ensured by JSC “Latvenergo”: – support to a poor or low-income family (person) will not exceed 100 kilowatt-hours per month for the price of 0.0131 euro per one kilowatt-hour; – support to a large family will not exceed 300 kilowatt-hours per month for the price of 0.0131 euro per one kilowatt-hour.

In 2015, the total price of electricity (including electricity price, trade services, mandatory procurement component, value added tax and network services) will be equal to the Start Tariff of 2014 – 11.64 euro per one kilowatt-hour. The terms and conditions for provision of the services to the protected consumers, their financial amount and procedures as of 2016 will be established by the Cabinet Regulations that have to be drafted and adopted in 2015. The trade services for the protected consumer will be provided by the enterprise, selected by the Ministry of Economics in tender procedures based on the ability to ensure trade services with the lowest co-funding from the state budget.

According to the provisions set in the EU Third “Augstsprieguma tīkls” is in charge of the development Internal Market Liberalization Energy Package, one of of a transmission network, safety of the electric power the factors ensuring optimum functioning of the transmission, stability of the power system and quality of electrical energy market will be a separation of network electrical energy, providing it in accordance with technical services from production and trading activities. and economic requirements and modern technologies. During the procedure of restructuring of JSC The Ministry of Finance is a shareholder of JSC “Latvenergo” – a vertically integrated energy supply “Augstsprieguma tīkls”. The owner of the transmission merchant with the Ministry of Economics as the system assets is the JSC “Latvenergo”'s subsidiary shareholder, electrical energy transfer and distribution company JSC “Latvijas elektriskie tīkli”, which started system operators have been legally separated. operating on 1 April 2011. As of 1 January 2015, all Pursuant to the Electricity Trade Register of the employees serving the high voltage network work for JSC Public Utilities Commission, 68 traders are registered as “Augstsprieguma tīkls”. of 29 April 2015, 24 of them have concluded a contract Since 1 July 2007, the operator’s functions of the on the use of the system with JSC “Sadales tīkls”. On 1 electrical energy distribution system are performed by January 2012, JSC “Augstsprieguma tīkls” – an JSC “Sadales tīkls” – an independent subsidiary company independent transmission system operator – started its of the JSC “Latvenergo”. JSC “Sadales tīkls” ensures the operation outside “Latvenergo” group. JSC supply of electrical energy to over one millionconsumers,

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 114 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY covering 99% of the entire territory of the state with their particular, in relation to calculation of capacities and service. Overall, there are 11 distribution operators in planning, overload management, balancing of networks. Latvia. The main requirements in relation to the quality The Nord Pool Spot (NPS) Latvian trade region of distribution services are laid down in the Cabinet began its operations on 3 June 2013. Currently, NPS Regulations on Requirements for Voltage of Public Electric trade regions are opened in all three Baltic States – Power Supply Networks of 4 October 2011, laying down Estonia, Lithuania and Latvia – and trade of electric mandatory application of the EU Standard LVS EN power across the entire Baltic Sea region is coordinated. 50160: 2010 Voltage characteristics of electricity supplied by The open electric power NPS trade region of Latvia public electricity networks adopted in Latvia. and the implemented next day market ELSPOT allow Thus, the evaluation of the options to improve the market players to submit their price offers for tariff structure for distribution services takes place. transactions which will take place the following day. The Currently, the tariffs for distribution systems for next step for the development of the electricity market in households are based only on the consumption of the Latvia was the introduction of the same day market – electrical energy. It is planned to divide the existing tariff ELBAS. The ELBAS market in Latvia was successfully in two parts – flat and variable. The flat rate would be opened on 10 December 2013. The difference between determined as a payment per ampere, its amount would the same day market and the following day market is that depend on electricity amount (amperes) of the input the price offers are submitted on the following day after protection appliance used for a connection, and it will publishing ELSPOT trade session results. Presence of determine the relevant costs. The variable part could be both markets ensures not only more liquidity of the determined based on the consumed electrical energy. Latvian energy markets, but also a more effective use of Such structure of tariffs would reflect more precisely the throughput and a reliable and transparent electric power grid costs, as they are not solely related to the amount of price to market players. distributed costs, it would ensure more efficient use of The electricity market of Latvia, just like the entire the grid that would result in lower investments in the Baltic energy market, is currently connected to the long term, and it would stimulate consumers to European energy market only through two underwater reasonably determine the necessary capacity, i.e., the cables between Estonia and Finland Estlink I with capacity of the input connection appliance, thus ensuring transmission capacity of 350 MW, and Estlink II with efficient use of grid capacity when the electrical energy transmission capacity of 650 MW. Transmission capacity consumption changes. of both interconnection cables is sufficient to level the In addition, to promote the development of prices in the Estonian and Finnish NPS trade areas. entrepreneurship, the distribution system operator Despite the fact that the implementation of such a currently evaluates the possibility to optimize the terms project may potentially have a positive influence on the and conditions for connections that, in addition to the integration of the Estonian-Finnish energy systems and right of the consumers of electrical energy to recover the liquidity of the Estonian-Finnish trade areas, it does not initial connection cost when complying with the criteria reduce the risk of overload in the Latvian-Estonian set in the Conditions for Efficient Load Use, would interconnection, which is a highly seasonal issue, but has envisage the right of a consumer of electrical energy not a characteristic negative influence on energy pricing to pay the initial connection cost, if the consumer dynamics in the Latvian and Lithuanian NPS trade areas. undertakes to comply with the criteria set in the Besides, Estlink II load transmission from Finland to Conditions for Efficient Load Use. Estonia might cause an extra load in the Latvian-

Complete integration of the Latvian, as well as Estonian interconnection, thus increasing the risk of Lithuanian and Estonian electric power markets into overload or line outage. the EU common market, joining the Nordic electric The current transfer capacity in the Estonian-Latvian power market and ensuring sufficient interconnections, is interconnection is insufficient for the necessary energy a significant aim not only for the Baltic States but also for trade in the Baltic region: between Estonia which has a the EU. surplus electricity produced in a year and Latvia and From the point of view of history, the electric power Lithuania where there is a clear electricity deficit. This transmission networks of Estonia, Lithuania and Latvia situation has a particular influence on electricity trade in are closely integrated in the transmission networks of the Baltic States in the summer season. The said limit of Belarus and Russia, operating in a parallel, synchronous transfer capacity causes considerable impediments for mode. Operational functions of energy systems are Latvia and Lithuania, as well as the Kaliningrad region to governed by BRELL contract concluded between import electric power from cheaper electricity regions – Belarus, Russia, Estonia, Latvia and Lithuania. Domestic Estonia and Scandinavia; as a result, the average trade of electrical energy in Russia and Belarus, as well as electricity price in Latvia and Lithuania is higher than in other CIS member states, fluctuations and emergency Estonia and Scandinavia. situations in energy system modes technically affect and To improve the capacity of the interconnections, it is overload electric lines of the Baltic States, limiting the planned to finish the Lithuanian-Swedish interconnection possibility of the Baltic States to fully implement the legal “NordBalt” with the transmission capacity of 700 MW. regulation of the EU in the electricity market, in Within the framework of the project, also the project

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 115 –

Kurzeme Circle, envisaging the construction of a 330kV third Latvian-Estonian interconnection would facilitate overhead line in the western part of Latvia to ensure the also the development of infrastructure of Latvia, Estonia possibility of increased capacity connection, to ensure the and Lithuania, since implementation of the third stage of development of wind farms and improve the safety of the transmission network modernization and electric power supply in Kurzeme, is being implemented. reconstruction project Kurzeme Circle will allow creating a The first stage of Kurzeme Circle includes the construction third Latvian-Estonian interconnection point. Total costs of a 330 kV high voltage line, connecting the Riga city of the Latvian-Estonian interconnection are 330kV sub-station “Rīgas TEC-1” to the sub-station approximately 112 million euro. Depending on the length “Imanta”; the line construction works, including of the line to be constructed, Latvia will have to assume inspections, were completed by 25 September 2013. The costs amounting to 102.3 million euro, while Estonia ~ 9 second stage of Kurzeme Circle includes the construction million euro, and the EU co-funding will be attracted to of the 330kV high-voltage line this project. Currently, the environmental impact Grobiņa-Ventspils; design stage initiated in 2010, but all assessment of the project is being carried out, and the works were finished in 2014. Construction costs of the route is surveyed. It is planned to put the interconnection first and the second stage of Kurzeme Circle are 98.5 into operation in 2020. million euro, 38.5 million euro of which are from the Both projects – Third Stage of Kurzeme Circle and the European Energy Regeneration Programme. To date, 66 Third Latvian-Estonian Interconnection – were included in the million euro have been invested in the first and second first list of the Projects of Common European Interest stage of the project. Costs of the third stage of Kurzeme (PCEI), and they may further apply for the Connecting Circle are 127.42 million euro, and it must be finished by Europe Facility (CEF). the end of 2018. Upon assessing the decisive effect of the submitted The third Latvian-Estonian interconnection is projects on the development of electricity market in strategically important since it allows preventing overload Latvia and in the Baltic States within the framework of of the current transmission networks and increasing the CEF, funding in the amount of 55.1 million euro has available transmission capacity of the Estonian-Latvian been granted for the project Third Stage of Kurzeme Circle, interconnection. The third Latvian-Estonian whereas 112.3 million euro have been granted for the interconnection project will significantly improve the project Third Latvian-Estonian Interconnection. As the PCEI electricity supply security in the interconnection between list is updated once in two years, the approval of the Estonia and Latvia, as well as electric systems of both second PCEI list is envisaged at the end of countries, by ensuring an efficient power transit corridor October/November of 2015. between the Baltic and Northern energy systems. The Figure 6.8

Energy Prices in Nord Pool Spot Exchange in 2014 (EUR per MWh)

60 Highest price Average price 50 Lowest price

10 SE1 SE2 SE3 SE4 DK1 DK2 Oslo Kr.sand Bergen Molde Tr.heim Tromsø

Latvia LithuaniaEstonia Finland Sweden Denmark Norway

Source: Nord Pool Spot

For the development of the energy sector of Latvia in Europe and Outside Europe, which states that one of the and the Baltic States and market integration in the long challenges in the field of electrical energy is term, the issue of synchronising of the Baltic electricity synchronization of the Baltic electrical energy transmission system with the continental Europe is transmission systems with the energy systems of the significant. In October 2013, the EC published the continental Europe, terminating actual isolation thereof statement the Long-term Opinion in the Field of Infrastructure from other EU states.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 116 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY

On 17 July 2009, the Memorandum of Understanding Among the most significant issues in the Baltic on development of the Baltic Energy Market Interconnection Region the following are to be mentioned: Plan (BEMIP) was concluded between the European – complete implementation of the internal market Commission and eight Baltic States, including the requirements in the States of the Baltic Sea, Republic of Latvia. Taking into account that a range of including opening of the market to households; initial BEMIP objectives have been accomplished since – overload management based on market 2009, new Memorandum of Understanding and Action principles, auctions of indirect capacities among Plan was drafted at the end of 2015. On 8 June 2015, the the Baltic States managed by Nord Pool Spot EC, Germany, Estonia, Latvia, Lithuania, Poland, (NPS) (useful for overload management Finland, Sweden, in the presence of Norway as an between Latvia and Estonia); independent observer, signed the new Memorandum of – development of a common reserves and Understanding. Denmark will sign the document later, as balancing power market; it expects new elections and a new government in the – development of a market place for financial near future. products in Latvia and Lithuania, starting The Action plan defines six main areas of activity, operations of Nasdaq OMX Commodities; namely, electricity and gas market, security of supply, – implementation of the Baltic State infrastructure energy infrastructure, nuclear energy, renewable energy projects included in the PCEI list; and energy efficiency, in which new competitive projects – improvement of the elements of the regional are necessary in order to achieve the objectives and dimension of the Pan-European electricity indicators laid down in the Action Plan. market models being currently developed; – desynchronizing of the electric power systems of the Baltic States from the electric power systems of Russia in the long term.

Box 6.11

Mandatory Electricity Procurement Component Taking into account the risk assessments carried out by the Ministry of Economics in 2012 and 2013 in relation to the increase in the total electricity price, as well as in order to gain assurance regarding the validity of intensity of the mandatory procurement of electricity and the guaranteed payment for the installed electric capacity, in 2014, complex measures were implemented with an aim to keep the mandatory procurement component (hereinafter referred to as the MPC) at the level of 2.69 euro cents per kilowatt-hour, including measures aimed at receiving the decision of the European Commission on the compatibility of aid with the internal market. In 2015, similarly to 2014, additional funds are planned to be used from the state budget for the aid to electricity consumers. The funds are mainly ensured from the subsidised electricity tax (SET) introduced on 1 January 2014, and directly reduce the impact of the MPC costs on all end users of electricity. Pursuant to Annex 4 to the Law on State Budget for 2015, the sub-programme 29.02.00 Aid to Electricity Consumers provides for the funds of 28 million euro in 2015. The MPC volume has not increased for electricity consumers in Latvia since 1 April 2014. The implementation of aid to electricity consumers from the state budget funds is planned until 2017. The increase of the mandatory procurement component and respectively the total price of electricity has a negative impact on the competitiveness of the national economy of Latvia, including creation of the added value. It is necessary to implement the policy that ensures the growth of the economy and eliminates worsening of the living standard of population. In the meeting of state secretaries on 7 May 2015, the Ministry of Economics announced the draft Cabinet Regulation “Procedures, according to which energy-intensive enterprises of manufacturing are to obtain the right to the reduced participation for the compensation of losses to a public seller occurred within the mandatory procurement of electricity and guaranteed price” (VSS-500), its annexes and annotation. The Cabinet Regulations are aimed at the improvement of the international competitiveness of the energy-intensive enterprises, creation of positive signals to increase the amount of the investments and the number of well-paid jobs, and promotion of the national economy by gradually increasing the share of the manufacturing in the gross domestic product. The precondition for the implementation of the Cabinet Regulation is ensuring conformity of the aid mechanism to new EC Guidelines on State aid for environmental protection and energy 2014–2020, obtaining an agreement from the European Commission on its conformity to the internal market of the European Union prior to commencing the aid, and non-increase in the MPC costs for other electricity consumers as a result of the said aid mechanism. A great challenge for the Ministry of Economics is related to further development of renewable energy and possibilities of creating a new aid mechanism. Until then, a decision must be made in 2015 regarding the need to continue moratorium in relation to the aid mechanism in the form of mandatory electricity procurement and a guaranteed payment for the installed capacity (Cabinet Regulations No.221 of 10 March 2009 and Cabinet Regulation No. 262 of 16 March 2010), including by understanding that the further aid for fossil energy resources will not comply with the new EC Guidelines on State aid for environmental protection and energy 2014-2020.

Natural Gas Market gas deliveries from Lithuania. The only natural gas The Latvian gas supply system is not connected to the storage in the Baltic States – the Inčukalns underground European Union common gas supply system. Latvia gas storage facility (UGSF) with the total capacity of 4.3 receives natural gas only from Russia, however, since billion cubic meters, including the volume of the active Klaipeda liquefied gas terminal started its operation at the natural gas of 2.3 billion cubic metres – is located in beginning of 2015, Latvia can obtain a limited volume of Latvia. In 2013, natural gas consumption was 1,461

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 117 – million m3 or by 3.1% lower than in 2012. The largest consumers – 16.8%, while the remaining part was formed consumers of natural gas in 2013 were CHP and heat of the consumption and loss of natural gas in the energy supply enterprises of JSC “Latvenergo” – 68.9%, sector. The Riga region uses about 65% of the natural gas manufacturing and construction – 11.9%, other consumed in Latvia. Figure 6.9

Comparison of Wholesale Prices for Gas in the EU* (EUR per MWh, 4th quarter of 2014)

no data

up to 21.00

21.00-25.00

25.01-29.00

more than 29.00

Finland

Sweden Estonia

Latvia

Denmark Lithuania United Kingdom

The Netherlands Poland Germany Belgium Czech Republic Slovakia

Austria Hungary France Romania

Italy Slovenia

Bulgaria

Spain

Greece

* the colour code for each country is determined according to the average arithmetic prices of all available types (natural gas trade platform, long-term agreement, liquefied natural gas) in the respective country Source: Quarterly Report on European Gas Markets. Market Observatory for Energy, DG Energy. Volume 7 (issue 4; 4th quarter, 2014)

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The wholesale prices for gas in the Baltic States are storage options and transmission tariffs, as well as the tax higher than on average in the EU. At the same time, it policy. should be noted that retail sales prices for households Currently, JSC “Latvijas Gāze”, which, according to and industrial consumers in the Baltic States are close to the Privatisation Agreement signed in 1997, has the exclusive the average level of the EU. It is due to several factors, rights to carry out transmission, distribution, storage, and for instance, the costs of the infrastructure, including trade of natural gas until 2017, is the only enterprise operating in the Latvian natural gas market. Figure 6.10

Half-year Price for Natural Gas in the Industry (EUR per MWh, 2nd half of 2014, taxes and duties included)

120 Group I1: annual consumption < 1,000 GJ Grou I2: 1,000 GJ < annual consumption < 10,000 GJ Group I3: 10,000 GJ < annual consumption < 100,000 GJ 90 Group I4: 100,000 GJ < annual consumption < 1,000,000 GJ Group I5: 1,000,000 GJ < annual consumption < 4,000,000 GJ Group I6: annual consumption > 4,000,000 GJ 60

Italy

Spain

EU-28

Latvia

France

Poland

Ireland

Greece

Austria

Croatia

Finland

Estonia

Sweden

Belgium

Bulgaria

Slovakia

Slovenia

Hungary

Portugal

Romania

Germany

Denmark

Lithuania

Netherlands

Great Britain Great

Luxembourg Czech Czech Republic

Source: Eurostat

The natural gas market at the EU level is regulated by rules for the internal market in natural gas and repealing the Directive 2009/73/EC of the European Parliament Directive 2003/55/EC (Directive 2009/73/EC). and of the Council of 13 July 2009 concerning common Figure 6.11

Half-year Price for Natural Gas in Households (EUR per MWh, 2nd half of 2014, taxes and duties included)

200 Group D1: annual consumption < 20 GJ Group D2: 20 GJ < annual consumption < 200 GJ 150 Group D3: annual consumption > 200 GJ

100

Italy

Spain

EU-28

Latvia

France

Poland

Ireland

Greece

Austria

Croatia

Estonia

Sweden

Belgium

Bulgaria

Slovakia

Slovenia

Hungary

Portugal

Romania

Germany

Denmark

Lithuania

Netherlands

Great Britain Great

Luxembourg Czech Republic Czech

Source: Eurostat

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 119 –

Considering the fact that the Latvian natural gas transparent and accessible to all system users and supply system is not connected to the EU common applicants who request access to the relevant system. At natural gas supply system, Latvia applies the exemption the same time, pursuant to the Law, the regulator shall “isolated market” from Directive 2009/73/EC until 2017. approve balancing calculation regulations drawn up by On 20 March 2014, the Saeima approved the draft law the system operator, which shall be transparent and non- Amendments to the Energy Law, envisaging gradual market discriminating to all users of the balancing service, and liberalization, stating that all consumers of natural gas will criteria for requesting guarantees, and the procedures to be entitled to choose a natural gas supplier from 3 April ensure payments for the balancing service. 2017. The separation of the distribution system operator In September 2014, JSC “Latvijas Gāze” submitted to must be completed by that time. The separation of the the Public Utilities Regulator the draft JSC “Latvijas distribution system operator must be completed by 3 Gāze” Regulations on the Use of Natural Gas April 2017, unless one of the following conditions Transmission System and draft JSC “Latvijas Gāze” occurs: Regulations on the Use of Inčukalns Underground – the natural gas system of Latvia is directly Storage Facility. The draft Regulations on the Use of connected to an interconnected natural gas system Natural Gas Transmission System establish procedures, of a EU Member State, except for that of Estonia, according to which users can apply for free capacity of Lithuania and Finland; international transmission system owned by JSC “Latvijas – the dominant supplier’s share in the total natural Gāze”, the rights and obligations of the transmission gas consumption of Latvia is less than 75 per cent. system operator and users, payment procedures for use and balancing of the transmission system, terms and At the same time, the amendments envisage that as of procedures for publishing internal information by the 4 April 2014 the operators of the natural gas transmission system operator. The draft Regulations on transmission, distribution, storage and liquefied natural the Use of Inčukalns Underground Storage Facility lay gas system must ensure equal and open access to the down the procedures, according to which users can make respective system to all users of the system and applicants reservation of the free capacity of the underground requiring such access, providing natural gas transmission, storage facility, the rights and obligations of the storage distribution, storage and liquefied natural gas system facility operator and users, payment procedures for use of services to them. Taking into account that the first the storage facility, and terms and procedures for commercial natural gas supplies under the first long-term publishing internal information by the storage facility contract in Latvia were carried out on 3 April 2004, operator. Several public discussions regarding the Latvia applied the exemption from requirements related regulations were held, and currently, the draft regulations to third party access to the natural gas supply system of will be detailed to ensure compliance of their provisions Directive 2009/73/EC until 4 April 2014. to the existing situation and regulatory enactments. In relation to third persons' access to the natural gas Continuing the liberalization of the gas market, the system pursuant to the Energy Law, the Public Utilities Cabinet of Ministers approved the further road map for Regulator shall approve the regulations on natural gas the reforms of the market on 3 March 2015, as well as transmission, distribution and storage or the regulations passed a resolution about the model of separation of the on the use of the system or the use of natural gas transmission system operator – complete separation of depository drawn up by the system operator, which shall the ownership as of 3 April 2017. be objectively based, economically justified, fair, equal,

Box 6.12

Natural Gas Supply Diversification Projects GIPL will connect the Rembelszczyzna gas compressor station in Poland with the Jauniunai gas compressor station in Lithuania. The aim of the project is not only to integrate the isolated natural gas market of the Baltic States into the EU, but also to ensure access to the EU gas trade platforms (for example, to the Central European Gas Trade Platform (CEGH)) and the Global Liquefied Natural Gas (LNG) market. A preliminary survey was carried out in 2011, and a feasibility study of the project was prepared in 2013. Construction of GIPL is planned for 2016–2019, though, considering the scale and nature of the project, time limits for implementation may be changed. The project investors are the Lithuanian company “Amber Grid” and the natural gas transmission operator of Poland GazSystem S.A. For the development of the feasibility study of the project, 50% of funding were received from the EU. GIPL has been included in the list of the EU priority projects, and funding of 306 million euro was allocated to the project in November 2014 within the framework of CEF. The total construction costs of GIPL are estimated at 558 million euro. Construction of GIPL will provide Latvia with access to other sources of natural gas supply, apart from Russia, and it will integrate the isolated natural gas market of the Baltic States in the EU natural gas market. The EC research carried out by an independent expert concludes that the optimum site for a regional LNG terminal is the Gulf of Finland. It should be noted that a significant role in the operation of the Baltic region natural gas market is played by Inčukalns UGSF in all scenarios.

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In order to diversify the natural gas market in Latvia The aim of the project is to increase the level of and the entire Baltic region, it is necessary to ensure an energy supply security in the Baltic Sea region, as well as alternative supplier of natural gas in the market. It is to enhance diversification of ways and sources for the possible by (see Box 6.12): supply of energy resources after the completion of GIPL – constructing the interconnection GIPL of the gas and Estonian-Finnish interconnections. The estimated supply systems between Lithuania and Poland project costs for modernization are 191 million euro, for provided for in BEMIP; enlargement – 360 million euro. The first stage of the – implementing a regional liquefied natural gas Modernization and Enlargement of Inčukalns UGSF (LNG) terminal project; project provides for increasing the natural gas retrieval – ensuring third party natural gas supplies to the capacity. Currently, 30 million cubic meters of natural gas region through the existing infrastructure (i.e. can be retrieved in 24 hours. It is expected that the diversifying sources of natural gas rather than natural gas retrieval capacity in 2020 will be 32 million ways). cubic meters in 24 hours. In situations when the natural gas demand will be higher than normally, for instance, Since Inčukalns UGSF is an essential element of the due to weather or interruptions in natural gas supplies Baltic region natural gas supply system, ensuring gas from third countries, Inčukalns UGSF will be able to supply not only to Latvia, but also to Estonia and Russia, grant the required volume not only in Latvia, but also in as well as serves as a security reserve for Lithuania, the Lithuania and Estonia. project Modernization and Enlargement of Inčukalns UGSF will be implemented.

Box 6.13

Centralized Heat Energy in Latvia In 2013, centralized heat energy was produced for sale in 638 boiler houses and 166 co-generation stations, in total, they produced 7.3 TWh centralised heat energy. Natural gas was the main resource for generating heat energy andelectricity. The share of the centralized heat energy produced using natural gas as fuel was 69.8%, 20.1% woodchips, 2.8% firewood, 0.2% heavy fuel oil, and other types of fuel – 4.1 per cent. The consumption structure of centralized heat supply has remained unchanged over the past years, with central heating comprising 65-70% and hot water supply – 30-35%. Since 2013, 71.1% of the total centralized heat energy final consumption has been distributed to households, 25.6% – to services, 2.2% – to industrial and construction sector, 1.1% – to agriculture. The breakdown of the centralized heat energy final consumption distributed by regions is the following: Riga region – 55.8%, Pierīga region – 10.6%, Vidzeme – 6.6%, Kurzeme – 9.8%, Zemgale – 7.4%, and Latgale – 9.8 per cent.

Securtiy Stocks of Petroleum Products Figure 6.12 As of 1 January 2013, the method for calculation of the petroleum product security reserve has been changed, Volume of Petroleum Product Reserve thus, an EU Member State within the Community and Amounts Paid under Contracts* territory must ensure the largest stock of petroleum products of the two recommended by the Community: 400 thousand tonnes (left axis) 35 either for 90 net import average volume days or for 61 million euro (right axis) average domestic consumption days. Since Latvia is an 28,8 28 importer of petroleum products, petroleum product 300 21.7 security reserves are formed for 90 net import average 19.9 volume days. 18.6 21 200 14

100 7

247.8 230.8 316.0 327.6 0 0 2011-2012 2012-2013 2013-2014 2014-2015

* In 2011-2012, contracts on Category I petroleum products were concluded as of January 2012.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 121 –

Renewable Energy Resources Amendments to the Cabinet Regulation No. 382 Latvia, like other EU Member States, has committed Application of Electricity Tax Exemption Procedures adopted to achieving the quantitative target set in the Directive on 12 June 2007 have been introduced by increasing the 2009/28/EC on the promotion of the use of renewable liquidity and transparency of the Latvian trade region of energy resources and amending and subsequently the electrical energy exchange NordPoolSpot, ensuring repealing Directives 2001/77/EC and 2003/30/EC, and in conformity of electricity prices to the current market the National Reform Programme of Latvia for the Implementation situation, which will ensure a positive effect on the of the “Europe 2020” Strategy – to achieve a 40% share of development of the Latvian national economy in future. renewable energy in the gross final energy consumption, To find a solution for the support of energy intensive as well as a 10% share of renewable energy in the gross enterprises in Latvia, reducing the negative effect of the final energy consumption in the transport sector in 2020. increase in electricity costs on competitiveness of these Cost-efficient use of local energy resources and safe enterprises, the Ministry of Economics has announced energy supply are among the main conditions of national the draft Cabinet Regulation “Procedures, according to which economic independence and energy supply safety. energy-intensive enterprises of manufacturing obtain rights to reduced Therefore, it is even more important to improve the participation in the compensation of mandatory electricity efficiency of the existing heat supply systems and use procurement and guaranteed payment expenses to public trader” energy resources more efficiently, thus contributing (VSS-500), its annexes and annotation in the meeting of state greatly to the reduction of greenhouse gas emissions. secretaries on 7 May 2015. Table 6.6

Share of Energy Produced from Renewable Energy Resources (per cent, in accordance with the methodology of Directive 2009/28/EC) 2000 2005 2009 2010 2011 2012 2013

In the gross energy final consumption 33.0 32.3 34.3 30.4 33.5 35.8 37.1 In the electricity sector 50.5 43.0 41.9 42.1 44.7 44.9 48.8 In heating and cooling 39.7 42.7 47.9 40.7 44.8 47.4 49.7 In the transport sector 1.5 1.4 1.1 3.3 3.2 3.1 3.1

By 2020, not only the contribution of the existing making a particular emphasis on the sector of heat instruments, but also the support measures for energy supply. When implementing new support measures for produced from renewable resources chosen to be electrical energy produced using renewable resources, implemented during the following years will be critical for development of economically disadvantageous projects Latvia to contribute to the prevention of climate changes shall be limited. and reduction of the import of fossil energy resources,

Insert 6.14.

Renewable Energy in Latvia Taking into account the objective of Latvia under the Directive 2009/28/EC and the National Reform Programme of Latvia for implementation of the EU 2020 strategy to reach 40% share of renewable energy by 2020, a share of 37.1% was achieved in 2013. In 2013, the gross electricity production volume reached 6209 GWh, which is by 0.7% more than in 2012. 56.9% (3534 GWh) of the total gross electricity volume produced was generated from RE (HPPs, wind, biogas, biomass, etc.). In 2014, the total installed capacity for electricity production from RE increased by 16 MW, as compared to 2013, constituting 1780 MW in total. In 2014, the total installed capacity of wind generators was 69 MW (67 MW in 2013), whereas the installed capacity of biomass and biogas plants – 121 MW (108 MW in 2013), increasing the volume of the produced electrical energy as well. A total of 24.5 thousand tonnes of biofuel (pure biofuel or mixture of fossil fuel and biofuel) was used for transport in Latvia in 2012. In 2013, compared to 2012, the consumption of biofuel in the final energy consumption for transport decreased, dropping to bioethanol consumption of 264 TJ (279 TJ in 2012) and biodiesel fuel consumption of 521 TJ (526 TJ in 2012).

The decision of the European Council on the coverage of electricity, the activity 3.5.2.2 Development framework of the EU climate and energy policy for the of Co-generation Power Plants Utilising Renewable period until 2030 adopted at the meeting of 23-24 Energy Sources of the supplement to the Operational October 2014, and objectives of policies arising out of Programme Infrastructure and Services is being the framework must be also taken into account. implemented. Contracts on implementation of 10 In order to significantly increase the production of projects have been concluded within the selection of electricity and heat energy from renewable resources, project applications for the Cohesion Fund’s (CF) diversify primary energy resource supply and increase the financing in the amount of EUR 28.8 million.

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Table 6.7

Final Consumption of Energy in the Transport Sector 2000 2005 2009 2010 2011 2012 2013 TJ

Final Consumption of Energy 32239 45746 48401 50855 45984 44713 45315 Fossil fuel 31692 45106 47792 49265 44603 43444 44084 Biofuel, – 107 173 1137 935 705 785 including: Bioethanol – – 108 350 318 279 264 Biodiesel fuel – 107 65 787 617 526 521 Electricity 547 533 436 453 446 464 446

per cent

Fossil fuel 98.3 98.6 98.7 96.8 96.9 97.1 97.2 Biofuel – 0.2 0.4 2.3 2.1 1.8 1.8 Electricity 1.7 1.2 0.9 0.9 1.0 1.1 1.0

In order to achieve the set objective for the share of have developed Energy Saving Catalogue that is available on renewable energy generated from renewable energy the website of the Ministry. resources in the gross final energy consumption in the The largest challenges of the Ministry of Economics transport sector, the consumption of biofuel should be in the coming years will be related not only to the promoted in various sectors, as well as the use of development of the support instruments for increasing environmentally-friendly private and public means of energy efficiency of multi-apartment residential houses, transport and additional measures aimed at the the public sector and heat supply, but also with development of the public and private electric transport identification of additional alternative measures with the infrastructure, for example, electrification and private purpose to reduce the amount of energy efficiency duty electric vehicle charging should be introduced. scheme and implementation of comprehensive

Energy Efficiency centralised heat supply and high efficiency co-generation While implementing the energy efficiency measures evaluation. within the sector of energy final consumption and energy To increase the efficiency of energy production, to transformation, Latvia attempts to achieve the set energy minimize the loss of thermal energy in the transmission saving target – to save 0.67 Mtoe by 2020. Along with and distribution systems and to promote the substitution this, Latvia must also achieve the state mandatory energy of fossil fuel with renewable fuel, several projects are final consumption saving of 0.850 Mtoe by 2020, as well implemented within the framework of CF. 135 as to renovate 3% of the area of the central governmental agreements on the implementation of projects for the buildings each year. total amount of 75.87 million euro of CF funding have The adoption of the requirements of the Directive been concluded by 21 May 2015 within the framework of 2012/27/EU of the European Parliament and of the the activity 3.5.2.1.1 Measures to Increase Efficiency in the Council of 25 October 2012 on energy efficiency, Centralized Thermal Supply Systems of the supplement to the amending Directives 2009/125/EC and 2010/30/EU and Operational Programme Infrastructure and Services, of which 67 repealing Directives 2004/8/EC and 2006/32/EC in laws projects for the amount of 48.04 million euro of CF and regulations is being continued. The draft law Energy funding have been completed. Agreements on the Efficiency Law has been approved in the Cabinet of implementation of five additional approved projects have Ministers on 19 May 2015. The aim of the law is to not been concluded (CF funding – 3.15 millioneuro). In ensure energy efficiency in the energy production, total, 349 MW thermal capacity is planned to be installed distribution and final consumption, imposing obligations within the projects, 180 km of the heat networks are planned to be reconstructed. on the public sector, local governments and private sector. Energy Efficiency of Energy-Consuming In addition, new informative regulatory enactments Products and amendments thereto have been and will be The EC continues working on improving energy developed. efficiency (eco-design) of energy-consuming products to To standardise the registration of the energy reduce the negative impact of such products on the efficiency, the Ministry of Economics together with the environment and to achieve higher energy savings over associations representing the sector and the companies their lifetime, as well as on the development of energy

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 123 – labelling for various product groups to raise consumer etc.), heating and cooling equipment, etc. (a full list of awareness of energy efficiency. adopted eco-design regulations is available on the EC More than 30 EC regulations on eco-design and Directorate-General for Enterprise and Industry websites energy labelling have been adopted since 2008, setting (eco-design – http://ec.europa.eu/energy/efficiency/ecodesign/ specific energy efficiency and labelling requirements for doc/overview_legislation_eco-design.pdf; energy labelling – energy-consuming products, which are binding on the http://ec.europa.eu/energy/efficiency/labelling/doc/overview_legisl Latvian producers, importers and distributors. Eco- ation_energy_labelling_household_appliances.pdf). Regulations design and energy labelling regulations apply to such are expected to be adopted for at least another 15 product groups as household and office equipment, product groups, including compressors, windows, lighting, household appliances (including TV sets, wastewater pumps and showerheads, within the next two washing machines, air cooling devices, vacuum cleaners, years.

6.5 Construction and Home Policy

The improvement of the business environment, the steel and concrete composite structures”, LBN 205-15 “Design of improvement of the national supervision system, as well stone structures”, LBN 215-15 “Design of earthquake-resistant as the reduction of the administrative burden are some of structures”, LBN 213-15 “Design of aluminium structures”, the main aims in the national construction policy. One which set the requirements for the design of concrete, of the tools to achieve these goals is the improvement of stone, aluminium, steel and concrete composite the system of laws and regulations governing the area of structures, as well as earthquake-resistant structures in construction and the improvement and optimisation of buildings and engineering structures. the institutional system of the sector. On 2 June 2015, the Cabinet of Ministers approved In 2014, a new Construction Law has entered into force. the Latvian construction code LBN 207-15 “Geotechnical It was prepared to create a state-of-the-art and modern design”, which sets the requirements for geotechnical regulatory framework for the construction process, in design. order to harmonise national law with EU laws and According to the regulations of construction codes, regulations and to promote the development of the the limited liability company “Standartizācijas, akreditācijas construction sector, as well as to advance the possibilities un metroloģijas centrs” (Standardization, Accreditation and for the society to co-operate in the decision-making, by Metrology Centre) publishes on the website of the ensuring maximum protection of the person proposing Standardization office www.lvs.lv a list of those Latvian construction and the interests of society. To ensure the national standards and national annexes to respective complete settlement of the construction process, in standards, which are applicable to the implementation of relation to the law, Cabinet regulations were developed construction codes for structures. and construction codes are currently reviewed and Regulation (EU) No 305/2011 of the European updated, according to the Construction Law. Related Parliament and of the Council of 9 March 2011 laying construction codes should be revised by 1 July 2015. down harmonised conditions for the marketing of To ensure complete adaptation of the Eurocode construction products and repealing the Council Directive standards into the system of laws and regulations 89/106/EEC prescribes several measures to simplify the regulating construction and to improve the national acquisition of CE marking thus reducing the standardization system for construction in Latvia, the administrative burden on companies, especially Ministry of Economics, in co-operation with the Latvian microenterprises, which will be offered a simplified Association of Structural Engineers and the opportunity to provide their products with CE marking, Standardization Technical Committee LVS/STK 30, if the construction products they place in the market do ensured the translation of 17 basic Eurocode standards, not raise safety considerations. 31 amendments to standards and 5 supplements to On 10 February 2015, the Cabinet approved standards into Latvian and their transposition into the amendments to the Cabinet of Ministers Regulations national standardization system, as well as developed Procedures for the Market Surveillance of Construction Products, 26 national annexes to the Eurocode standards. laying down the procedure for evaluation of compliance On 23 December 2014, the Cabinet of Ministers of construction products, which are not subject to approved two Latvian construction codes – LBN 204-14 harmonised technical specifications and Latvian national “Design of steel structures” and LBN 206-14 “Design of wood standards defined in the Annex 1 to the Regulations — structures”, which set the requirements for the design of the regulations now include minimum requirements for steel and wood structures in buildings and engineering documentation to be enclosed with each batch of structures. produced construction products, when offering the On 26 May 2015, five Latvian construction codes construction product in the Latvian market. These were approved at the Cabinet of Ministers’ session: LBN amendments updated the Procedures for the Market 203-15 “Design of concrete structures”, LBN 212-15 “Design of Surveillance of Construction Products, which ensure the

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 124 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY availability of information on all construction products been available in the Construction Information System offered in the Latvian market. (https://bis.gov.lv/bisp/lv/construction_merchants) since 2014. To ensure quality and safety of construction, as well The registration in the Register of Construction as to improve the state surveillance system in the Merchants entitle merchants to perform commercial construction sector, the Building Control Bureau ensures activities in one or more construction areas, as well as in the monitoring of the operation of public buildings as of the area of architecture or electric energy. The Register of 1 January 2015, and will start to ensure national control Construction Merchants includes data on merchants and of construction works of new public buildings and construction specialists employed by them (architects, commissioned public buildings as of 1 July 2015. engineering research specialists, designers, construction The Latvian Construction Council is operating in experts, managers or supervisors of construction works), Latvia in 2015, to promote public participation in the data about the scope of construction works provided by development and implementation of construction construction merchants themselves and by the use of policies, and its goal is to provide the Ministry of subcontractors, data about the average number of Economics and other sectoral ministries with persons employed in construction and the violations recommendations for draft laws and regulations and draft committed by construction merchants in construction, policy planning documents, as well as draft EU which have been found according to laws and regulations international laws and regulations affecting the and reported to the register, as well as remarks about construction sector according to public interests, and to exclusion from the Register of VAT Payers of the State inform the public on the latest news in the construction Revenue Service for violations of laws and regulations. sector. 8580 construction specialists (the number of active By 20 May 2015, 5286 merchants (the number of construction specialists), to whom 10 691 certificates active construction merchants), incl. 392 construction have been issued, including 668 certificates issued in 2015 merchants in 2015, have been registered in the Register (including re-registered certificates), are registered in the of Construction Merchants maintained by the Ministry Register of Construction Specialists of Economics, which was created on 1 July 2005 and has (https://bis.gov.lv/bisp/lv/certificates).

Box 6.15

Improvement of the Regulatory Framework The Following Cabinet of Ministers orders and regulations were issued according to the Construction Law and Cabinet of Ministers’ Regulations of 7 October 2014 No 610 Regulations for Evaluation of Competence and Supervision of Permanent Practice of Construction Specialists to delegate the evaluation of competence and the supervision of independent practice of construction specialists in engineering research, design, management and supervision of construction works: – Cabinet of Ministers decree No 181 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the “Latvian Union of Heat, Gas and Water Technology Engineers”; – Cabinet of Ministers decree No 182 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the “Latvian Association of Electric Energy and Energy Construction Specialists”; – Cabinet of Ministers decree No 183 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the “Latvian Association of Architects”; – Cabinet of Ministers decree No 184 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the “Latvian Association of Construction Engineers”; – Cabinet of Ministers decree No 185 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the “Latvian Fraternity of Electricians”; – Cabinet of Ministers decree No 186 of 14.04.2015 On delegation of the evaluation of competence and the supervision of independent practice of construction specialists to the Railwaymen Association of Latvia; – Cabinet of Ministers Regulations No 176 of 07.04.2015 Price list of paid services provided by the “Latvian Union of Heat, Gas and Water Technology Engineers” at the order of the public administration; – Cabinet of Ministers Regulations No 177 of 07.04.2015 Price list of paid services provided by the “Latvian Association of Architects” at the order of the public administration; – Cabinet of Ministers Regulations No 178 of 07.04.2015 Price list of paid services provided by the Railwaymen Association of Latvia at the order of the public administration; – Cabinet of Ministers Regulations No 179 of 07.04.2015 Price list of paid services provided by the “Latvian Association of Construction Engineers” at the order of the public administration; – Cabinet of Ministers Regulations of No 180 07.04.2015 Price list of paid services provided by the “Latvian Fraternity of Electricians” at the order of the public administration; – Cabinet of Ministers Regulations of No 181 07.04.2015 Price list of paid services provided by the “Latvian Association of Electric Energy and Energy Construction Specialists” at the order of the public administration.

On 15 April 2015, delegation agreements were concluded with the authorities verifying competence of construction specialists. Starting from 2016, the Building Control Bureau will be in charge of evaluation of competence and the construction examinations, supervising the independent practice of construction specialists.

The Register of Construction Specialists registers practice in engineering research, design, management and persons, who have obtained rights to independent supervision of construction works and construction

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 125 – inspections, or have obtained a construction specialist As the development of the project progressed, certificate. The Register of Construction Specialists besides the already existing registers of construction includes information on the construction specialist’s merchants, construction specialists, construction education, independent practice (list of works in the inspectors and managers, a Register of Independent performance of which the construction specialist has Experts in the Area of Energy Efficiency of Buildings, participated), information about the certificate, which is and a Register of Energy Certificates of Buildings were granted to the construction specialist (area, speciality and included in the Construction Information System, and area of activities), information about decisions made by also e-services are developed, including a review of a the competence verification authority and documents construction concept, issue of a construction permit, related to these decisions, with regard to the specialist, coordination of simplified reconstruction or renovation and the information on professional improvement of the and commissioning of buildings, as well as electronic construction specialist. application forms in registers. By 20 May 2015, 233 persons (the number of active When the system is implemented in full, the public construction inspectors) who are granted construction will obtain a convenient and expedient mechanism to control rights, incl. 15 construction inspectors in 2015, trace processes in the construction sector, and an option have been registered in the Register of Construction for public control of the construction, which will reduce Inspectors maintained by the Ministry of Economics, the possibility of starting illegal construction or which was created on 4 November 2010 and has been corruption. available in the Construction Information System In the area of housing policy, Cabinet Regulations on (https://bis.gov.lv/bisp/lv/building_inspectors) since 2014. Determination, Calculation and Registration of the Portion to be The Register of Construction Inspectors: Paid by Owners of Residential Houses are being drafted. It – for the acquisition of public control rights for prescribes the criteria or methods for the distribution of construction works and structures, registers all the services required for maintenance of a residential persons who have obtained a second level house under Section 6(2)(1)(b) of the Law On vocational higher education in the area of Administration of Residential Houses — heat energy, also architecture in a study programme for architects natural gas, water supply and sewerage, and removal of or in the area of construction in the study domestic waste. programme for construction engineers, a Cabinet Regulations on Public Aid for Acquisition or certificate of a construction specialist and have at Construction of a Residential Space entered into effect on least five years long independent practice in the 5 August 2014. These regulations prescribe that Joint area of architecture or construction; Stock Company “Latvijas attīstības finanšu institūcija” – for the acquisition of the public control rights (Latvian Development Financial Institution) issues a for construction works and use of structures, guarantee to persons, who live together with or have in registers persons who have obtained a second their custody at least one minor. From the start of the level vocational higher education in the area of support programme and until 31 March 2015, architecture in a study programme for architects 78 guarantees for the total guarantee amount of or at least a first level professional higher 448.2 thousand euro have been granted.

education in the area of construction in the study By 20 May 2015, 618 managers (the number of active programme for construction engineers, a managers), incl. 17 managers in 2015, have been certificate of a construction specialist and at least registered in the Register of Managers of Residential five years long independent practice in the area of Houses maintained by the Ministry of Economics. It was architecture or construction; created on 1 January 2012 and has been available in the – for the acquisition of public control rights for Construction Information System construction works of railway engineering (https://bis.gov.lv/bisp/lv/house_managers) since 2014. structures, registers persons who have obtained a The main task of the Register of Managers of second level vocational higher education in the Residential Houses is to provide the latest information on area of railway in a study programme for persons handling or wishing to handle the management engineers or at least five years long practice of residential houses and meeting the requirements of the experience in construction of railway engineering law. This register includes information about services of structures. managers according to the NACE classification, the territory of provision of the services, qualification of the In the process of developing the Construction manager or its employees, and the register also contains a Information System, an e-service was created, to remark on the rights of the manager to offer provide information to competence verification management services in the market, depending on the authorities on education, independent practice and professional qualification acquired. The data of the professional improvement of construction specialists, for register on the residential houses managed by the the evaluation of competence and supervision of manager are available to registered users of the system. independent practice.

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6.6 Tourism Policy

The tourism policy in Latvia is developed with a view – an increase in the daily average expenditure of a of promoting the development of domestic and foreign overnight traveller; international tourism, increasing the competitiveness of – an increase in the total annual expenditure of the tourism industry and export of tourism services. foreign overnight travellers. In 2010, the Latvian Tourism Marketing Strategy 2010- 2015 was developed and approved, defining the vision of The main lines of action: development of tourism in Latvia and objectives for – to ensure the recognition of the Latvian tourism achieving it, as well as determining Latvian priority offer in the target markets, especially through tourism products, key principles of their development modern means of communication; and target markets. According to the priorities set out in – to promote the improvement of the quality of the strategy and involving the representatives of the tourism products, also by ensuring a better tourism industry, a new image of Latvian tourism was regulatory framework of the industry and support developed, which has become a unifying idea and both to the tourism businesses and consumers of common element of the product and marketing the products; development activities in the public and private sectors. – to promote the development of competitive On 1 July 2014, a medium-term tourism policy tourism products, supporting the development of planning document Latvian Tourism Development Guidelines new, innovative tourism products with a higher 2014-2020 was adopted, where MICE tourism (meetings, added value, by developing an infrastructure for incentives, conferences, and exhibitions), wellness the growth of tourism, promoting the formation tourism, nature tourism, culture tourism and creative of regional tourism clusters and inclusion of the industries were established as the strategic forms of Latvian tourism product into the common tourism. Sustainable development of Latvian tourism, tourism offer of the Baltic Sea Region. promoting the increase of competitiveness of tourism services in foreign markets, has been set as the objective Further development of tourism products must be of the tourism policy. The policy results and performance based on such fundamental values as quality, indicators to be achieved are: sustainability (including the introduction of green – an increase in the number of foreign overnight technologies and approaches), individualization, high travellers; added value, cooperation, involvement of – an increase in the average occupancy (bed tourists/gaining experience and cooperation for ensuring occupancy rate) of accommodation competitiveness. establishments outside the busy summer season (except for June-August);

Box 6.16

Tourism Development Indicators According to the data provided by the UN World Tourism Organization, the number of international tourists in 2014 reached 1.138 billion, which is by 4.7% or 51 million more, if compared to 2013. America (+ 7%) has shown the best results among the regions, while in other regions the increase is more moderate: + 5% in Asia and Oceania, + 4% in the Middle East and + 2% in Africa. There was a 4% increase in Europe, largely facilitated by the increase in the number of travellers in the Mediterranean countries and Northern Europe (+ 7%). Traveller survey data show that the number of trips of foreign overnight travellers in Latvia increased by 20% in 2014 (1.8 million), if compared to 2013. In 2014, 1.4 million foreign visitors used the accommodation services in Latvia, which is by 14.5% more than in the previous year. Tour operators in Latvia served 175.1 thousand foreign travellers who purchased package travels in Latvia or abroad. Upon assessing the incoming tourism structure by countries, it can be concluded that, in 2014, Latvia was most often chosen as the destination for overnight travel by tourists from Russia (19%), Lithuania (14%), Estonia (10%), Sweden (9%) and Germany (9%) which, making up 61% of all foreign travellers, corresponds to the high-priority markets defined in the Latvian Tourism Marketing Strategy 2010–2015. Upon assessing the incoming and domestic tourism, it can be concluded that Latvian hotels and other accommodation establishments served 2.1 million Latvian and foreign visitors in 2014 who spent 4.2 million nights there. If compared to 2013, the number of people served increased by 14.1%, while the number of nights spent increased by 10.1%. In terms of bed occupancy rate describing the hotel demand, a moderate increase in hotel occupancy can be observed. However, large seasonal fluctuations can still be observed. The highest rate of hotel occupancy in 2014 was observed in July in the hotels of Latvia in general at 69% and in Riga at 78.9%. Export of tourism services in Latvia grew by 4.4% in 2014. The expenditure of foreign visitors for recreation and other personal trips in Latvia increased by 14.7%, while the expenditure for business travel decreased by 3.1%. In 2014, the travellers’ balance remained positive reaching 182.5 million euro. The travellers’ balance in Latvia has been positive since 2011, when the balance was only 3.6 million euro.

To ensure a consistent involvement of industry Agency (LTDA) has been working actively to bring partners in the implementation of tourism policy, the together authorized representatives of professional and Advisory Council of the Latvian Tourism Development regional tourism associations, the advertising industry, as

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 127 – well as the Ministry of Foreign Affairs and the Riga In the first half of 2015, LTDA has ensured the Tourism Development Bureau. participation of the national stand of Latvia in 9

Support Measures international tourism exhibitions, organized Latvian In 2015, the main priorities of LTDA, a subordinate tourism presentation events, press conferences and institution of the Ministry of Economics, concern the workshops in the priority tourism markets, implemented facilitation of a single tourism information system, the Latvian cultural tourism campaign in 8 countries, promotion of the Latvian tourism image and promotion organised visits of foreign media and tour operators to of Latvia as a tourist destination, conducting marketing Latvia, published tourism information materials, regularly research in the domestic and international tourism published information in the official tourism portal market, improvement of the quality of tourism services, www.latvia.travel and Facebook page If you like Latvia, Latvia as well as the development of domestic tourism and likes you. A number of marketing studies have been implementation of international cooperation. launched, the results of which will be used for the Annual state budget co-financing for facilitating the development of the Latvian Tourism Marketing Strategy 2010-2015. development of tourism within the framework of the ERDF Operational Programme Entering External Markets In 2015, the total amount of funding (state budget — Strengthening the International Competitiveness of Industries is funds and ERDF co-funding, as well as funding for the redirected towards the following activities: implementation of the project EDEN) for tourism – organizing national stands at international marketing is 3.6 million euro. exhibitions abroad; – organizing advertising campaigns abroad.

Box 6.17

Improvement of the Regulatory Framework In the Cabinet meeting of 19 November 2013, the draft decree prepared by the Ministry of Economy was approved granting the status of a resort to the administrative territory of the Jurmala City, except the territories of Varnukrogs, Priedaine and Brazciems. The Cabinet Regulations Procedures for the Granting and Cancellation of the Status of a Resort regulating the process of granting the status of a resort were adopted on 18 December 2012, while the Jurmala City requested this status in February 2013. To ensure the inclusion of the “silence means consent” principle (in compliance with the Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market) in the registration of tourism agents and operators in the Travel Agents and Tour Operators (TATO) database, amendments to the Regulations Regarding the Rights and Duties of Tourism Operators, Tourism Agents and Clients, the Procedures for the Preparation and Implementation of a Package Tourism Service, the Information to be Provided to a Client and the Procedures for Deposition of Security Guarantee of Money of 13 April 2010 came into force on 8 February 2013. To ensure effective implementation of the Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours, informing both the consumers and other interested parties on the activities of the business operators of the industry, as well as contributing to the prevention of fraud in the industry, the Ministry of Economics established the TATO database (http://tato.em.go.lv) in 2010. As of 18 May 2015, a total of 660 business operators were registered in the database, 53 of whom have registered their activity as tour operators, 186 as travel agents and tour operators, but 421 as travel agents. The information contained in the database is publicly available to anyone interested, and the Ministry of Economics invites Latvian travellers to make sure that the activities of the service provider comply with the laws and regulations, in particular regarding the security guarantees on the money paid by the tourists.

International Cooperation in the Field of tourism, which can be considered as an international Tourism acknowledgment of the progress of the Baltic states in In 2015, Latvia continues to develop closer building regional cooperation in the field of tourism. cooperation in the field of tourism with other countries, The amendments to the agreement aim to promote especially with high-priority tourism target markets: the integration of the Baltic States into international Lithuania, Estonia, Finland, Sweden, Russia, and tourism activities. One of the most important Germany. Issues related to the promotion of cooperation amendments provides for the possibility to establish in the field of tourism are regularly included on the shared tourism information offices or appoint shared agenda of foreign visits of intergovernmental tourism representatives in the relevant and third commissions and senior government officials. countries. Similarly, amendments to the Agreement The funding allocated to the LTDA is primarily used clarify and complement the directions of cooperation of for advertising campaigns and marketing activities in the the parties, for example, by providing for cooperation in said target markets. the development of the Baltic tourism brand, reduction During the 12th European Tourism Forum that took of the administrative burden, usage of advanced place on 17 October 2013 in Vilnius, Lithuania, a technology for the development of tourism, as well as protocol was signed on amendments to the Agreement of development of the projects of various international the governments of the Republic of Latvia, Republic of Estonia and assistance programmes (e.g., EU funds). Republic of Lithuania on cooperation in the field of

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An important step in promoting international Commission, which deals with facilitating the recognition cooperation has been the fact that in October 2013, of Europe, including Latvia, as a tourist destination. In Latvia received an invitation to join the OECD Tourism April 2015, the general meeting of the European Travel Committee. Latvian authorities responsible for tourism Commission was organized in Riga with the participation are expecting to work together with the rest of the of the representatives of European national tourism OECD Member States in developing the prospects of organizations and the United Nations World Tourism national and international tourism, as well as promoting Organisation. sustainable growth of tourism. The Latvian Tourism Development Agency continues In 2015, the national tourism organizations of the to implement two EC-funded projects in 2015: the Baltic States are cooperating in the implementation of project European Destinations of Excellence – EDEN in joint marketing activities in the distant markets (Japan, cooperation with the Lithuanian State Department of the USA, China), as well as implementing other Tourism, as well as the project The Iron Curtain Trail – cooperation activities – organizing an international Euro Velo 13, which aims to facilitate the development of workshop for tourism professionals, Baltic Connecting the Euro Velo 13 route in countries where it is not yet 2015, visits of journalists and tour operators, publishing completed, to develop tourism products for bicycle informative materials about the Baltic tourism, organizing travellers in order to encourage the flow of tourists along tourism presentations and a press conference of the this route. In order to achieve the project objectives, the Baltic States. leading partner of the project and coordinator of Euro At the international level, representation of Latvia’s Velo routes in Europe – the European Cyclists’ interests in the field of tourism is mainly ensured by the Federation – after evaluating the current situation and participation in the work of European tourism development of the route in each of the countries, has authorities. Latvia regularly participates in the work of the involved national and regional tourism organizations, European Commission's Tourism Advisory Committee tour operators and educational institutions as partners, a and is an active member of the European Travel total of 13 organizations from 8 countries.

6.7 Improvement of the Business Environment

There are several essential tools for assessing the hindering their activity. Thanks to the said tools, a list of business environment: the World Bank’s international tasks to be carried out has been prepared within the survey Doing Business, as well as the Study of the Impact of framework of the annual Action Plan for Improvement of the Administrative Procedure on the Business Environment that help Business Environment. to find out the views of entrepreneurs on the factors Figure 6.13

Ranking of Latvia and other EU Member States in the World Bank’s Study Doing Business 2015 (business environment as a whole)

100

64 65 59 61 50 54 56 51 48 42 44 37 38 25 31 32 33 27 24 25 21 23 17 13 14 8 9 11 0 4 DK UK FI SE IE DE EE AT LV LT PT NL FR PL SP SK BG BE CZ RO SI HU IT LU EL CY HR MT

In the World Bank’s study Doing Business 2015, the entrepreneurs, Latvia ranks 9th among the EU Member reference period of which is from 2 June 2013 until States, giving way to Denmark, the United Kingdom, 1 June 2014, Latvia ranks 23rd among 189 countries. In Finland, Sweden, Ireland, Germany, Austria, and Estonia. the assessment of environment favourable to

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Table 6.8 of the operation of public buildings has been launched, control and commissioning of The Benchmark Figures of Latvia in the World Bank’s construction works will be launched as of 1 July Study Doing Business 2014-2015 2015, and it is planned to start the monitoring of 2014 2015 Changes construction specialists in the field of expertise as of 1 January 2016; Starting a business 26 36 -10 – in the field of real estate registration – Building permits 48 47 -1 electronic registration of real estate has been introduced and the principle of one-stop agency Electricity connections 82 89 -6 has been introduced in the real estate registration Registration of real estate 33 32 +1 process – as of 29 October 2014, certain persons Credit register 19 23 -4 can submit electronically signed corroboration Protection of investor requests to the Land Register, using a specially (minority) rights 48 49 -1 developed form at www.zemesgramata.lv; as of 1 January 2015, a person who wishes to register a Payment of taxes 28 24 +4 real property does not have to visit two Cross-border trade 26 28 -2 institutions anymore — back-up data exchange Fulfilment of contractual has been launched in the State Unified obligations 15 16 -1 Computerised Land Register and the information Closing a business 38 40 -2 system of the Immovable Property State Cadastre; – in the field of taxation and accounting:

– a new Draft Law on Annual Accounts and It should be noted that methodological changes have Consolidated Annual Accounts has been drafted been made to a number of indicators of the Doing Business to transpose the Directive 2013/34/EU. The 2015, thus the evaluation now includes indicators that draft law was supported in the first reading were measured differently thus far, and the evaluation of at the Saeima on 13 May 2015; Latvia has changed accordingly. Consequently, it is not – a decision was made by the Ministry of possible to make a completely unbiased comparison of Finance on the introduction of tax payments the results of participating countries from the previous according to the FIFO method and the years with Doing Business 2015. introduction of a single account for all tax The Study of the Impact of Administrative Procedure on the payments. Currently, the concept of the Business Environment 2014 shows that Latvian ERDF project Modernization of Tax entrepreneurs spend, on average, 13% of their working Information Services is being agreed upon (it is time addressing issues related to administrative expected to approve it at the Cabinet of requirements. Regulatory areas, administrative Ministers by 1 September 2015 and sign the procedures, and potential obstacles to entrepreneurship, ERDF project implementation agreement by included in the set of instruments of the study in 2014, 1 February 2016 — it is planned to were considered as hindering the development of complete the task by 2021 (provides for business less often than in the previous studies (since changes in the system of the State Revenue 2001). Service (SRS), and amendments to laws and Measures to improve the business environment are regulations will be necessary); implemented in Latvia since 1999. The Ministry of – in the field of cross-border trade: Economy, with the participation of a wide range of – Information has been published on the SRS sectoral ministries and organizations representing website on 1 January 2015 on the process of entrepreneurs, prepares the Action Plan for the Improvement transit cargo clearance for the export of of the Business Environment, which is updated and approved goods from the Freeport of Riga; by the government annually. – as of 13 February 2015, companies can On 28 November 2014, the Cabinet of Ministers make customs payments calculated by the approved the Action Plan for the Improvement of the Business customs authorities online via the portal Environment 2014-2015. The plan includes 70 tasks. As of www.latvija.lv. As from April 2015, 20 May 2015, 25 tasks have been completed. The main entrepreneurs can submit data for the tasks: registration of temporary storage of goods – in the field of starting a business – as of 1 June electronically; 2015, the payers of micro-enterprise tax will no – in the field of fulfilment of contractual longer need to separately provide the SRS with obligations – as from 1 January 2015, natural details on the acquisition of the employee’s status persons can follow the data of court proceedings when registering a company in the Register of online, in the portal www.tiesas.lv, in cases where Enterprises; the represented legal entity is a party to the case; – in the field of construction – the State Building Control Bureau has been established, monitoring

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– in the field of closing a business – as of an accrual basis must be continued and one 1 March 2015, amendments to the Insolvency Law account for all tax payments must be ensured have come into force providing for the providing for making these payments according to improvement of the legal framework in order to the FIFO method (first in, first out); avoid problems that have been observed in – in the field of investor protection the provisions practice and are related to the application of the of the Commercial Law must be reviewed and the Insolvency Act. The amendments, among other possibility to determine the force, effect and things, provide for ensuring that the protection of enforceability of contractual provisions for the creditor’s and debtor's rights is strengthened. shareholders of enterprises must be assessed, along with the possibility to verify the accuracy of The simplified registration of employees of persons information submitted to the commercial register paying the micro-enterprise tax in the company on its merits and the possibilities to establish foundation process, the introduced electronic registration mandatory provisions in the Commercial Law in of real estate, as well as the expected changes in the relation to joint-stock companies (or possibly also procedure of obtaining building permits will have a to limited liability companies). In case of a positive impact on the rating of Doing Business. The work substantial violation of the said provisions, the commenced on the simplification of administrative respective decisions of public administration procedures in the field of accounting and taxes, institutions and other actions shall be fulfilment of contractual obligations and procedures automatically declared as null and void; related to closing a business, will facilitate – in the field of fulfilment of contractual entrepreneurship in Latvia, as well as contribute to the obligations, the regulatory framework for the improvement of the international assessment in future implementation of electronic document periods. circulation in judicial authorities must be aligned, The following priority tasks have to be carried out strengthening of the principles of specialization of within the next year: judges must be continued, and case load – in the field of starting a business, e-service indicators must be determined. Registration in the Registers Maintained by the Register of Enterprises of the Register of Enterprises must be On 28 November 2014, the Cabinet of Ministers reviewed in order to improve the efficiency of the approved the amendments to Action Plan for Improvement of service, and digitalization of the documents kept the Business Environment 2014–2015 providing for the in the archive of the Register of Enterprises must introduction of the “silence-consent” principle in the be carried out, territorial jurisdiction of companies services of 17 state administration institutions, for must be given up; example, in the certification and re-certification of judicial – in the field of construction, complete operation experts, issuing a certificate for experts in the field of of the Construction Information System project conservation of species and habitats, registration of as of 1 July 2015 must be ensured; classification of veterinary medical service providers, as well as the construction merchants must be established; operation of animal cemeteries. The principle is planned – in the field of real estate registration, the to be implemented by 2017. It should be noted that by amount of information to be received in the Land now the principle has been introduced in 15 state Register electronically from local governments, administration services. Along with the integration of the namely, the information regarding the waiver of “silence-consent” principle, the amount of resources pre-emptive rights, must be increased; (time, expenses) needed for the holders of permits and – in the field of accounting and taxes, certificates in dealing with administrative formalities in introduction of the accounting of tax payments on public administration institutions will be reduced.

6.8 Small and Medium-Sized Enterprises

Small and medium-sized enterprises (SMEs) in Latvia, the activities of micro-enterprises, thus reducing the level as well as elsewhere in Europe, account for a large part of of unemployment, as well as to develop entrepreneurial the economy, and they have a significant role in the skills, thereby increasing the share of entrepreneurs in the formation of the GDP and employment. total number of employed people. The concept is being implemented successfully. Support Measures for Micro-Enterprises On 30 October 2009, the Cabinet of Ministers Amendments to the Commercial Law of May 2010 approved The Concept of Support Measures for Micro- significantly reduced the costs of starting a business, Enterprises which aims to create the necessary prescribing that a limited liability company (SIA) may be prerequisites for urging the unemployed to start business formed with a reduced share capital (starting from 1 activities, to create a business environment that facilitates euro). Also the stamp duty for registering such a limited

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 131 – liability company was reduced. According to the data of 60.7% of which were limited liability companies with a the Register of Enterprises, there were 12 thousand reduced share capital. limited liability companies registered as of 20 May 2015,

Box 6.18

The Number of Small and Medium-sized Enterprises in Latvia According to the CSB data from 2013, there were 93,775 economically active individual merchants and commercial companies in Latvia (excluding agricultural and fishing farms and self-employed persons performing economic activity), 99.6% of which corresponded to the SME category. The distribution of the economically active SMEs in Latvia: 86.2% are micro enterprises, 11.1% are small enterprises, 2.3% are medium-sized enterprises, whereas 0.4% are large enterprises. The number of economically active merchants and companies (including agricultural and fishing farms and self-employed persons performing economic activity) per 1000 inhabitants is an important indicator of economic activity. The indicator of Latvia has grown constantly over the last 10 years from 17 in 2001 to 78 in 2013. It is equally important to highlight the number of individual workers (self-employed persons) reaching 50,882 in 2013 (25 per 1000 inhabitants), and the number of agricultural and fishing farms reaching 11,366 in 2013 (6 per 1000 inhabitants). Given the fact that there is no single methodological practice in the EU Member States for the calculation of such an indicator characterizing economic activity as the number of enterprises per 1000 inhabitants, it is difficult to conduct an objective comparative analysis of this indicator. The current practice of the competent EU institutions shows that the calculation of the number of enterprises per 1000 inhabitants included both individual merchants and commercial companies, as well as self-employed persons, agricultural and fishing farms, etc. Thus, by applying an analogous practice, there were 78 performers of economic activity per 1000 inhabitants in 2013 in Latvia. According to the statistics of the Register of Enterprises, 16,404 entities were registered in the registers maintained by the Register of Enterprises and 6664 entities were excluded from the said registers in 2014. 18,035 entities were registered in the registers and 4300 entities were excluded from the registers in 2013.

Definition of SMEs Definition of SMEs given in the Commission Recommendation 2003/361/EC: medium-sized enterprises: – number of employees: 50–249; – annual turnover not exceeding 50 million euro; – annual balance sheet total not exceeding 43 million euro; small enterprises: – number of employees: 10–49; – annual turnover not exceeding 10 million euro; – annual balance sheet total not exceeding 10 million euro; micro-enterprises: – number of employees: 1–9; – annual turnover not exceeding 2 million euro; – annual balance sheet total not exceeding 2 million euro;

The Micro-enterprise Tax Law came into force on the rate will be 11% in 2015, 13% in 2016, and 15% 1 September 2010 providing for the possibility of legal starting from 2017. This was introduced to increase the and natural persons to acquire the status of a payer of the social guarantees of the employees of micro-enterprise micro-enterprise tax, subject to meeting certain criteria tax payers. (shareholders are natural persons, turnover does not At the same time, amendments to the Micro-enterprise exceed 100 thousand euro a calendar year and the Tax Law entered into force on 13 May 2015 providing for number of employees is not more than five), and to make maintaining the micro-enterprise tax rate of 9% in 2015 micro-enterprise tax payments in the amount of 9% and later on during the first three years of operation with (includes all the national tax payments, excluding the status of a micro-enterprise tax payer, but starting consumption taxes) of turnover or business income. As from the fourth year of operation the micro-enterprise of 1 January 2015, there were a total of 41,343 registered tax rate will increase to 12 per cent for micro-enterprise micro-enterprise tax payers, who employed more than tax payers with a turnover exceeding 7000 euro. 78.4 thousand employees in 2014. It is easier for the Additional changes to the Micro-enterprise Tax Law micro-enterprises to perform the formalities at the SRS (4 provide for authorizing the Cabinet of Ministers to reports a year). determine the sectors in which micro-enterprises will not It should be noted that significant changes have been be able to acquire the status of a micro-enterprise tax made to the Micro-enterprise Tax Law in the past two years. payer, and amending the Law on State Social Insurance by On 6 November 2013, the Saeima adopted 1 January 2016, prescribing that micro-enterprise amendments to the Micro-enterprise Tax Law, introducing employees, in addition to the provisions of the Micro- changes to the procedure of calculation of the micro- enterprise Tax Law can be socially insured to achieve the enterprise tax rate. The amendments prescribe that the amount of mandatory social insurance contributions rate shall be 9% for a micro-enterprise tax payer, the within three years corresponding to the amount of annual turnover of which does not exceed 7 thousand employer and employee contributions calculated from the euro, while in case the turnover exceeds the said amount, minimum monthly wage established by the Cabinet of

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Ministers. In case the relevant amendments to the Law on profession (mostly craft services). The payers of license State Social Insurance have not come into force by fees are provided with respective social guarantees. 2698 1 January 2016, a micro-enterprise tax rate of 13% will be payers of license fees have been registered at the SRS established in 2016, but in 2017, 15%, according to the during the time period from 1 January 2010 until 1 May amendments to the Micro-enterprise Tax Law adopted on 2015. The average monthly number of license fee payers 6 November 2013. during the said period was 317. Primarily the

As of 1 January 2010, a natural person performing representatives of such professions as photographers, economic activity in certain professions or activities may nurses, stylists, make-up artists, crochet and embroidery choose to pay a license fee, which is a final tax payment specialists, hairdressers and manicurists choose to register for economic activity of the natural person in a given as payers of a license fee.

Box 6.19

EU Activities for the Support of Entrepreneurship Small Business Act for Europe On 25 June 2008, the EC approved the report Small Business Act for Europe, the main goal of which is to improve the overall policy approach to entrepreneurship by integrating the use of the principle Think Small First in the policy document drafting process, in particular by promoting the development of SMEs and helping to prevent the obstacles hindering the development. The Act includes 10 proposals for politically binding guidelines and a number of specific regulatory proposals for laws and regulations. So far, various activities have been implemented at the EU and national level that comply with the guidelines set out in the Small Business Act. On 8 September 2014, the EC launched a public consultation to gather the views and ideas of the Member States and organizations representing entrepreneurs on who the Small Business Act for Europe should be revised, continuing the European Policy to Support SMEs 2015–2020. The consultation is based on research carried out by the Network of SME Envoys, and it takes into account the political debate on the future SME policy, which took place in September 2013 at the Competitiveness Council of Ministers. Four main directions of the Small Business Act, namely, to facilitate SMEs’ access to finance and markets, to reduce the administrative burden and to promote entrepreneurship, are also priorities in the coming years. In addition, after a proposal by the SME Envoys, a fifth priority has been proposed: to prevent the lack of skilled labour. The public consultation on the Small Business Act for Europe ended on 15 December 2014. On 2 March 2015, the EC provided the EU Competitiveness Council with an overview of the results of the public consultation the Small Business Act for Europe, stressing that the consultation had a high response rate. Responses of approximately 1800 respondents were received, more than 60% of which were companies. The respondents have recognized the following as important SME support pillars: reduction of the administrative burden, access to markets, access to finance, skills and abilities, as well as support for innovation. Currently, the EC is carrying out a detailed analysis of the results of consultations, and they have been published on the EC website.

European Small and Medium-Sized Enterprises (SME) Week In order to implement the objectives of the Small Business Act for Europe, the EC organized the annual European-wide campaign European Small and Medium-Sized Enterprises (SME) Week in 2014 to provide the existing and future entrepreneurs with information (seminars, conferences, discussions, etc.) about the activities of the EU, national, regional and local government institutions related to regulation of entrepreneurship, thus promoting entrepreneurship and showing recognition to entrepreneurs for their investment in Europe’s prosperity, creation of jobs, innovation and competitiveness. During the Small and Medium-Sized Enterprises (SME) Week 2014 in Latvia, 46 events were organized from September until November, involving more than 2000 entrepreneurs. These events were dedicated to the implementation of innovative business ideas, starting a business, facilitating export and strengthening of co-operation networks between entrepreneurs, the science sector and potential investors. The event Small Business Day was organized within the framework of these measures in Latvia to provide practical information to entrepreneurs about how to expand the customer base, to approach potential partners and how to spot new business opportunities. Small Business Days were organized in Daugavpils, Ogre, Liepaja, Ventspils, Valmiera, Jelgava and Riga, involving more than 300 participants. Information about the process of the SME Week 2014 can be found on the website of the Ministry of Economics: https://em.gov.lv/lv/nozares_politika/nacionala_industriala_politika/uznemejdarbibas_vide/es_uznemejdarbibas_veicinasana/es_mvu_nedela/

Measures Facilitating the Start of a Business programme. The total funding available within the In order to facilitate the formation and development framework of the programme is 28.6 million euro of new, viable and competitive economic operators in the (including ERDF co-funding of 24.4 million euro). regions of Latvia, providing them with the environment In order to use all the project funding available, on and advisory services necessary for business, LIDA is 2 September 2014, LIDA announced a procurement implementing the ERDF co-funded project procedure on the provision of business incubation Development of Business Incubators in Latvia. services (the total contract price is 4 million euro, the Overall, from 2009 until 2014, incubation services contract performance deadline is 31 October 2015). were received by 603 micro-, small and medium-sized LIDA accepted tenders until 11 December 2014. As of enterprises in 10 Latvian regional business incubators and 22 May 2015, 7 contracts have been concluded: the business incubator of creative industries in Riga. – with the society “Latgale Machinery and These economic operators ensured (maintained) 1364 Technology Centre” regarding the facilitation of jobs. By the end of 2014, 22.1 million euro had been formation and development of new businesses in spent for ensuring the support measures provided by the Latgale Planning Region 2 (Rezekne, Vilani business incubators within the framework of the municipality, Rezekne municipality, Ludza

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municipality, Zilupe municipality, Cibla business incubator of creative business industries municipality, Karsava municipality, Rugaji in Riga; municipality, Balvi municipality, Vilaka – with the Riga Technical University regarding the municipality); formation and development of new businesses in – with the general partnership “Riga Region the Vidzeme Planning Region 2 (Cesis Business Development Incubator” regarding the municipality and Madona municipality); facilitation of formation and development of new – with LLC “Energo Consult” regarding the businesses in the Riga Planning Region (Ogre formation and development of new businesses in municipality and Tukums municipality); the Zemgale Planning Region 2 (Jelgava – with LLC “B-CAP” regarding the formation and municipality and Dobele municipality); development of new businesses in Kurzeme Planning Region 1 (Ventspils, Ventspils Ensuring Access to Finance for Entrepreneurs municipality, Dundaga municipality, Roja On 15 April 2015, the single financial institution municipality, Talsi municipality, Mersrags JSC “Attīstības finanšu institūcija Altum” was formed by municipality); merging three companies that provided support in the – with LLC “Kurzemes Biznesa inkubators” form of financial instruments: “Latvijas attīstības finanšu regarding the formation and development of new institūcija Altum” (ALTUM), “Latvijas Garantiju businesses in the Kurzeme Planning Region 2 aģentūra” (LGA) and “Lauku attīstības fonds” (LAF). (Liepaja, Kuldiga municipality, Saldus JSC “Attīstības finanšu institūcija Altum” continues the municipality); implementation of all the previous state aid programmes – with LLC “HUB Riga” regarding the formation of ALTUM, LGA, and LAF (see Box 6.20). and development of new businesses in the

Box 6.20

Establishment of the Development Finance Institution On 15 April 2015, the single financial institution JSC “Attīstības finanšu institūcija Altum” was formed by merging three companies that provided support in the form of financial instruments: “Latvijas attīstības finanšu institūcija Altum” (ALTUM), “Latvijas Garantiju aģentūra” (LGA) and “Lauku attīstības fonds” (LAF). JSC “Attīstības finanšu institūcija Altum” takes over all the rights and obligations of ALTUM, LGA, and LAF. After the formation of a single institution, the full spectrum of state aid programmes and financial instruments — loans, venture capital, guarantees, aid to farmers — are available in one place: Programmes implemented by LGA to date: – Credit guarantees; – Export credit guarantees; – Mezzanine loan; – Venture capital; – Microcredit; – Support for training.

Programmes implemented by ALTUM (until 1 January 2014, the Mortgage and Land Bank of Latvia) to date: – Start programme; – Microcredits; – SME microcredit programme; – SME growth loans; – Loans for investment in the improvement of infrastructure; – Loans for the improvement of competitiveness; – Loans to farmers; – Loans for the acquisition of land; – Housing guarantee programme; – other services.

Programmes implemented by LAF to date: – Credit guarantees for farmers; – Loans for the acquisition of land.

The establishment of the development finance institution was carried out in two stages. The first stage included the transfer of shares of ALTUM, LGA, and LAF to JSC “Attīstības finanšu institūcija” (AFI), forming a concern of development finance institutions. The second stage included the reorganisation of AFI, ALTUM, LGA, and LAF, forming a single development finance institution. This stage was finished on 15 April 2015. All the shares of the single development finance institution JSC “Attīstības finanšu institūcija Altum” are owned by the government of Latvia: the Ministry of Finance, the Ministry of Economics and the Ministry of Agriculture are the shareholders. The aim of JSC “Attīstības finanšu institūcija Altum” (Altum) is to effectively and professionally provide support to certain target groups in the form of financial instruments (loans, guarantees, investments in venture capital funds, etc.) with the help of state aid financial instruments, supplementing the said support with non-financial aid (advice, training, mentoring, etc.) within the framework of specific programmes, as well as to fulfil other functions delegated by the government.

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Currently, the most significant support programme in euro, for farmers — 3.1 million euro. In addition, in terms of the amount of loans is the Support accordance with the conditions of the programme, the Programme for the Improvement of Competitiveness maximum loan amount for small businesses operating in of Businesses approved by the Cabinet of Ministers in the service sector is 43 thousand euro. Until October May 2008. Micro-, small and medium-sized enterprises 2014, 1128 loans in the total amount of 65.5 million euro registered in Latvia that have economically justified plans were granted within the framework of the programme. for further activities, but do not have the access to the In May 2010, ALTUM launched the Current Asset funding of credit institutions due to increased risks, are Loan Programme for Agricultural Producers. Current supported within the framework of the programme. asset loans from 7 thousand to 1 million euro for a Investment loans (up to 1.4 million euro) and current period of up to 2 years can be received by agricultural assets loans (up to 0.7 million euro) are granted within producers, as well as groups of fruit and vegetable the framework of the programme. If a loan exceeds 500 producers. The maximum amount of loans to co- thousand euro, before receiving the loan from ALTUM operative partnerships of agricultural services may reach the customer must receive an approval from their 2.8 million euro. LAF guarantees can be attracted to commercial bank, if they have commitments with it. these loans. To date, 1118 loans in the total amount of From the commencement of the Support Programme for 51.6 million euro have been granted within the the Improvement of Competitiveness of Businesses until framework of the programme. 31 March 2015, 158 loans in the amount of 78.6 million In September 2011, the Cabinet of Ministers euro have been granted within the framework of the approved the Latvian and Swiss Micro Lending ERDF-funded part of the programme. Wood processing, Programme. The programme aims to improve the power generation, pharmaceutical product and food opportunity of micro-enterprises to receive financial industry are the most frequently represented industries of support for business start-up or development. The the projects supported. programme is implemented within the framework of the The ESF co-funded programme Support for Latvian-Swiss Cooperation Programme, and the total Starting Self-employment and Business approved by funding of the programme is 7.2 million euro1. 6.6 the Cabinet of Ministers in march 2009 offers complex million euro are provided for micro loans for investments support to persons who wish to start a business and and current assets of up to 14.2 thousand euro, but 620 newly established businesses, namely, advice, training and thousand euro for grants to repay loans. The programme loans (up to 85 thousand euro) and interest rates in the will be implemented until June 2015. So far, micro loans form of subsidies to start their business. Population of have been granted to 1070 micro-enterprises in the working age, including the unemployed, who have amount of 8.9 million euro. expressed a wish to start a business or self-employment, In May 2012, the Cabinet of Ministers approved the as well as new businesses are eligible for the support. For regulation on the Lending Programme for Acquisition the purposes of this programme, start-up businesses are of Agricultural Land. Within the framework of the the economic operators that have registered their activity programme, loans in the amount up to 430 thousand according to the law not earlier than three years prior to euro are available for the acquisition of agricultural land requesting support within the framework of the for the production of products and acquisition of the programme, as well as entrepreneurs with business buildings located on the piece of land, if the cadastral experience who intend to produce a new product or value of the buildings does not exceed 30% of the provide a new service if they establish a new business for cadastral value of land. According to the Cabinet this purpose. The cost of the project provided for in the Regulation, ALTUM accepts the loan applications, business plan may not exceed 85 thousand euro, while assesses them, grants and administers the loans within the co-financing of at least 10% of the cost of the project framework of the programme, but the decision on provided for in the business plan for the implementation granting a loan, based on the bank’s recommendation, is of the business plan must be provided for projects for made by the LAF. Practical activities of the programme which the amount of loan exceeds 7 thousand euro. were launched in July 2012, and 517 loans in the amount Since the commencement of the programme, 1298 of 25.9 million euros have been granted so far. start-up projects have been supported for the total On 10 March 2009, the Cabinet of Ministers adopted amount of loans of 24.7 million euro. Regulations on the Activity 2.2.1.3 “Guarantees for In September 2009, the Cabinet of Ministers adopted the Development of Enterprise Competitiveness” of regulations on the loans for facilitating the development the Appendix to the Operational Programme of micro-, small and medium enterprises and co- “Business and Innovation”. The Regulations aim to operative partnerships of agricultural services. According provide enterprises with the access to finance for to these regulations, ALTUM launched the SME Growth Loan Programme in February 2010. The programme aims to improve access to funding for 1 Loan Fund has been established for the provision of financial aid – economic operators registered in Latvia, thus micro loans and grants – within the framework of the programme, contributing to economic development. The maximum and 80% of the funding is provided by Switzerland, 20% by ALTUM. loan amount per economic operator is 430 thousand Whereas 80% of the programme management costs are covered by Switzerland, 20% from the state budget.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 135 – development of their business and implementation of the In May 2009, the Cabinet of Ministers adopted the projects of EU funds, providing guarantees in situations Regulations on Short-term Export Credits prescribing the where the financial means of the enterprise are coverage and recipients of short-term export credit insufficient for receiving a loan and banks consider the guarantees, the procedure of providing guarantees and enterprise to be too risky, as well as to facilitate the procedure of covering the losses by the guarantor. competitiveness of Latvian enterprises, to foster entering The LGA’s export credit guarantee covers up to 90% of new markets, and strengthening the position in the the deferred payment, but no more than 1 million euro or existing markets. an equivalent amount in another currency. The period of In April 2009, LGA launched the activity Guarantees the deferred payment shall not exceed 2 years. for the Development of Enterprise Competitiveness. From the launch of the export credit guarantee The amount of ERDF funding granted within the programme until 31 March 2015, 159 agreements on framework of this activity was 15.4 million euro. In late export guarantees have been concluded for the total 2013, the activity was discontinued. The funding granted amount of 14.8 million euro within the framework of the within the framework of the activity is still used for the Export Credit Guarantee Programme. provision of state aid, including the granting of Most (99%) of the companies that have concluded guarantees. agreements represent the manufacturing (such as The LGA provides credit guarantees for such production of communication equipment, household financial services as investment loans, current asset loans, electrical equipment, products of veneer sheets and financial leasing, domestic factoring, as well as bank wooden panels, soaps, detergents, cleaning and polishing guarantees (bid, advance payment, payment, performance agents, food products, etc.). When considering the or time guarantee). The guarantees cover up to 80% of distribution by countries, most guarantees have been the principal amount of the financial service, but no more provided to the markets of CIS countries: Russia (31%), than 1.5 million euro per company. Kazakhstan (19%) and Belarus (18%), as well as to such From 2009 until 31 March 2015, 274 credit countries as Azerbaijan (6%), Indonesia (5%), Uzbekistan guarantees for the total amount of 104 million euro were (4%), etc. issued within the framework of the Credit Guarantee In August 2011, the Cabinet of Ministers adopted the Programme. Regulations on Mezzanine Loans for the Improvement of Until 31 March 2015, most of the guarantees in terms Competitiveness of Economic Operators prescribing the of amount within the framework of the credit guarantee conditions for granting support in the form of a programme were granted to companies operating in the mezzanine loan for the improvement of following industries: 44% in the manufacturing, 22% in competitiveness of economic operators. The maximum construction, 8% in electricity, gas supply, heat supply amount of a mezzanine loan is 5 million euro. The and air conditioning. Most of the guarantees in terms of amount of a loan may not exceed 40% of the total costs the number consist of current asset guarantees of the investment project. amounting to 44%, 21% investment guarantees, and 24% As of 31 March 2015, 122 mezzanine loans for the financial leasing guarantees. total amount of 28.7 million euro had been granted. A On 30 May 2013, the LGA started granting mezzanine loan is intended to provide long-term funding guarantees to housing insulation projects. Until 31 March to Latvian entrepreneurs in addition to the loan issued by 2015, 45 guarantees for the total amount of 6.1 million a bank, to cover all the costs of the investment project in euro were granted for housing insulation projects. Most tangible and intangible assets that are related to the of the guarantees in terms of the amount were granted in formation of a new enterprise, expansion of the existing Kurzeme reaching 29%, with 27% in Vidzeme and 21% enterprise, diversification of production with new in the Riga region. additional products or a fundamental change of the overall production process.

Box 6.21

Growth Capital Funds Expansion Capital Fund focuses on growth-stage companies that have already completed the product development stage and need funding to start commercial production, more aggressive marketing and sales of the product. Priority is given to export-oriented companies, as well as companies with a high growth potential. The team of the fund has extensive experience in the fields of woodworking, metalworking, machinery and equipment production, chemical industry, transport, food, IT services, waste processing, printing, healthcare and packaging. In addition to funding of growth-stage companies, FlyCap Investment Fund I is planning to invest 20–30% of the available funding in newly established companies which already have a developed business model and proven product viability, by attracting the first customers. The priority sectors are manufacturing, IT, health care and business services. ZGI-3 plans to diversify its portfolio by investing about 10% of the available funding in the companies of the seed capital stage, 20% in the stage of start-up capital, while the remaining funds, in the companies of the growth capital stage.

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On 6 August 2013, three new venture capital funds expansion of activities, increasing production capacity, were established that operate in accordance with the new developing markets and products. Growth capital funds venture capital state aid programme For Growth Capital make investments in companies with a high growth Funds approved by the Cabinet of Ministers on 29 May potential. Growth capital funds are financed from the 2012. These funds – Expansion Capital Fund, FlyCap funding available within the framework of the sub- Investment Fund I, and ZGI-3 (see Box 6.21) – continue activity of the EU Structural Funds Investment Fund for the providing Latvian SMEs with the access to venture Investments in Guarantees, High-Risk Loans, Venture Capital capital funding for starting or developing a business, as Funds and Other Financial Instruments. It is planned that the well as promote competitiveness and growth of total investment amount of growth capital funds in entrepreneurs. Growth capital funds improve and expand Latvian companies could reach 30 million euro. the venture capital sector in Latvia, adding to the offer of Two microloan funds commenced their activities in other venture capital funds implemented by the August 2014: Capitalia and Grand Credit. Microloans are development finance institution Altum. Growth capital medium-term loans for small and medium-sized funds allow receiving venture capital in situations where enterprises to finance investments in current assets and the company's own funding is insufficient and the risk of capital assets. This type of financing is particularly the company’s planned investment is too high, in order appropriate for cases when bank funding is not available to attract the necessary amount of funding from credit to the company or it does not meet the requirements for institutions. As of 31 March 2015, 33 investments for the receiving a loan, such as the company’s branch and total amount of 10.3 million euro have been made. duration of activity, the available security or other Growth capital funds may make investments in reasons. The amount of a microloan is up to 25 thousand micro-, small and medium-sized enterprises carrying out euro, which is granted to finance the formation, growth their economic activities in Latvia. Investments of up to and expansion of activity of economic operators, as well 1.5 million euro may be received by a single company to as to attract current assets for the implementation of finance the research, assessment and development of the viable business projects. As of 31 March 2015, 33 initial concept of the company’s product or business idea, microloans for the total amount of 0.5 million euro have product development and initial marketing, growth and been granted.

6.9 Innovation and New Technologies

In the report on results of innovation in EU Member According to the data of the Central Statistical Bureau States Innovation Union Scoreboard 2015 (Report) published (CSB), the total funding for research and development by the EC for the year 2014, where 28 EU Member (R&D) in Latvia in 2013 was 0.6% of the GDP or States were surveyed, Latvia ranks 26 (Estonia – 13, 139.2 million euros (in 2012, 0.66% or 145.4 million Lithuania – 25). Latvia, together with Bulgaria and euros). The investment of the private sector (companies) Romania, is placed in the group of Modest innovators, as in R&D in 2013 constitutes 21.8% of total investments in performance of these states in the field of innovation is R&D or 0.13% of the GDP (in 2012, 0.16% of the lower than 50% of the EU average. At the same time, in GDP). Funding of the state and universities for R&D the period from 2007 until 2014, the average growth of activities has also decreased in 2013, in actual figures Latvia’s indicators included in the Report constituted constituting 37 million euros or 0.16% of the GDP in 3.4%, which is the highest indicator among EU Member 2013, compared to 38.5 million euros (0.16% of the States (the average growth in the EU is 1%). GDP) in 2012. The amount of foreign funds, including It can be concluded from the Report that Latvia has the EU structural funds, for R&D has slightly decreased relatively better results in the development of human in 2013 compared to that in 2012 and was 71.8 million resources (the number of inhabitants with higher euros (in 2012, 73.3 million euros), which constitutes education, the number of young people with the highest 0.31% of the GDP (in 2012, 0.33%). level secondary education), as well as the indicator which Upon assessment of the current tendency which characterises company expenses for innovation other shows a drop of total expenses for R&D in the last two than research and development (R&D). Whereas a drop years, it is important to emphasize that the aim of R&D can be observed in such indicators of the report as investment, promoted in the Latvian National Reform company expenses for R&D, innovative SMEs which Programme for Implementation of the “EU 2020” Strategy, cooperate with other companies, fast growing innovative which provides for increasing the total amount of R&D companies, publications prepared collectively by the investment in Latvia in 2015 to 1% of the GDP, and to public and private sectors. Such indicators as the number 1.5% of the GDP in 2020, might not be achieved. of public and private scientific publications, the number According to the innovation survey conducted by the of doctoral programme students outside the EU, income CSB for 2010-2012, it can be observed that in the report from licences and patents abroad, expenses of companies period, the number of companies active in the field of for R&D are below the EU average. innovations has increased, constituting 30.4% of the total number of companies (in the period 2008-2010, 29.9%).

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By analysing the structure of innovative companies by resources for these companies for implementation of their size, it can be concluded that large companies are research, development and innovation activities, more active in the field of innovations – 64.6% of all including limited opportunities to attract finances because large companies have been assessed as innovative. In the of high technological and business risks. It should be group of medium-sized companies, 43.2% of all noted that in the period from 2010 until 2012, when companies have been innovative, whereas in the category 30.4% of companies being active in the field of of small companies only 26.5% were assessed as innovation were surveyed, 64% of them had innovative. The potential and performance of innovation implemented innovations of products and processes, of small and medium-sized enterprises is affected by whereas 36% of all innovative companies had limited human resources and available own financial implemented marketing or organizational innovations. Figure 6.14

Components of the Innovation Report in 2014 (index)

EU-28 Human resources 0.7 Latvia 0.6 Research environment Economic effects 0.5 openness, excellence and attraction 0.4 0.3 0.2 0.1 Innovation activity 0 Financing and support

Intellectual property Company investment

Cooperation and business of companies

Source: EC, Innovation Union Scoreboard 2015

In compliance with the existing policy planning implementation of National Research Programmes was documents, the main directions for improving the continued in 2015. National Research Programmes is a Latvian innovation system in 2015 are as follows: government order to conduct scientific research in a – development of the potential of scientific activity; certain sector of economy, education, culture or any – promotion of long-term co-operation between other national priority, in order to promote development companies and scientists; of this sector. The financing for national research – support for development of innovative programmes is allocated within the framework of the companies. Value of Latvian Ecosystems and Its Dynamics under the Climate Impact; Within the direction of development of the (3) NRP Multifunctional Materials and Composites, Photonics and potential of scientific activity implementation of Nanotechnologies; (4) NRP Innovative Materials and Smart Technologies for activities was continued in Latvia in 2015 in order to Environmental Safety; (5) NRP Cyber-physical Systems, Ontologies and Biophotonics for Safe and Smart City and Society; (6) NRP National develop internationally competitive scientific institutions Programme for Research of Next Generation Information and Communication with modern material technical provision, and to increase Technologies; (7) NRP Biomedicine for Public Health; (8) NRP Research and the number of employees in the sector of science and Sustainable Use of Forest and Subsoil Resources – New Products and research. Technologies; (9) NRP Agricultural Resources for Sustainable Production of 1 Qualitative and Healthy Food Products in Latvia; (10) NRP Innovative According to 14 National Research Programmes for Solutions in the Social Telerehabilitation in Latvian Schools in the Context of 2014-2017 approved by the Cabinet of Ministers, Inclusive Education; (11) NRP Transformation, Smart Growth, Management and Legal Framework of Economics for Sustainable Growth of the State and Society – New Approaches for Development of Sustainable Knowledge Society; 1 National Research Programmes (NRP) approved by the Cabinet of (12) NRP Innovation and Sustainable Development: Latvian Post-crisis Ministers: (1) NRP Energy Efficient and Low Carbon Capacity Solutions for Processes in the Global Context; (13) NRP Sustainability of Latvian Cultural Secure, Sustainable and Climate Variability Reducing Power Supply; (2) NRP Traditions in Innovative Environment; (14) NRP Letonika.

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 138 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY annual state budget financing. In 2014, a tender was was continued in 2015 in order to accelerate the announced for National Research Programmes 2014–2017, processes of commercialisation of research results, and to which resulted with the Decree of the Cabinet of improve the system of technology transfer. A significant Ministers No. 558 of 7 October 2014 “On National activity in this direction is the support available within the Research Programmes”, approving 10 programmes with the framework of the programme Centres of Competence, as well total financing of 20.67 million euros, whereas under the as the work started on implementation of a new system order No. 559 “On Additional National Research of technology transfer. Programmes” the Cabinet of Ministers approved another In 2015, the Investment and Development Agency of four National Research Programmes with the total financing Latvia (IDAL) continued supporting co-operation of of 5.34 million euros. In total, 28 draft programmes were scientists and companies for conducting collective submitted for the National Research Programmes 2014–2017 industrial research and development of new products and procurement with the total required amount of financing technologies within the EU structural funds programme amounting to 32.9 million euros. In 2015, 6.15 million Centres of Competence. Centres of competence are euros are allocated for implementation of the second established in 6 sectors which are significant for the stage of National Research Programmes. economy: the pharmaceutical and chemical industry, ICT, For improvement of the infrastructure of the leading the forest sector, manufacturing of electric and optical national significance research centres and ensuring devices, environment, the sector of bioenergetics and modern material technical basis for research activities, biotechnologies, and the sector of transport and implementation of the activity of the EU structural funds mechanical engineering. The programme Centres of Development of Research Infrastructure is continued in 2015. Competence will be implemented by 31 December 2015, The total co-financing of the EU structural funds for the and its total public financing constitutes 53.17 million activity constitutes 103.9 million euros, and it is euros. It is estimated that additional private financing of implemented in two rounds of selection. In the first at least 20 million euros will be attracted for R&D round with the total co-financing of the EU structural activities as a result of the operation of all competence funds in the amount of 80.1 million euros, 9 projects are centres. In 6 centres of competence established within being implemented since the end of 2011, modernizing the programme, a total of 231 projects of industrial and appropriately equipping 9 research centres of studies and development of new products and national significance, covering 27 national scientific technologies are implemented, 84 of which were institutions. In the second round of selection of projects completed by the end of 2014. Centres of competence of the activity in 2014, implementation of two projects involve a total of 165 companies and 24 scientific was completed with the total co-financing of the EU institutions, and 705 research and development jobs have structural funds constituting 7.5 million euros, whereas in been created, during the implementation of the projects. 2015 implementation of three projects is continued with Furthermore, implementation of the Cluster Programme, the total co-financing of the EU structural funds equal to administered by IDAL and co-financed from the EU 11.1 million euros. Implementation of projects results in structural funds, was continued in 2015. The Cluster the development of research infrastructure in the private Programme is created to improve co-operation between sector and ensures the provision of research services for unrelated companies of one sector, research, educational the private sector. Since the launch of these projects until and other institutions in order to raise competitiveness of 1 May 2015, financing of the EU structural funds in total sectors and companies by collectively implementing of 86.1 million euros and the state budget financing of activities for development of new products and services, 1.5 million euros has been allocated to the beneficiaries and to plan coordinated conduct for acquisition of new for the improvement of science infrastructure. export markets. The Cluster Programme provides support In 2015, also the EU structural funds activity Support for 11 cluster projects, which involve more than 300 for Science and Research continues, providing support for the companies and more than 20 educational and research implementation of applied research projects in national institutions in total, as well as a range of non- priority directions of science. In 2015, implementation of governmental organizations and municipalities. The total 24 projects approved in the second round of selection public financing of the programme until 2015 constitutes with the total amount of the EU structural funds co- 4.95 million euros. financing constituting 6.2 million euros and At the same time, improvement of a system of implementation of 41 projects approved in the third technology transfer took place in 2014, for the operation round of selection with the total amount of the EU of which it is planned to attract financing of the EU structural funds co-financing of 10.76 million euros structural funds planning period 2014–2020. The system continues. By 1 May 2015, 810 internationally recognized of technology transfer is established to raise the income publications have been published and 92 international of scientific institutions from commercialization of state patent applications have been submitted within the financed studies, and to achieve that the results of studies framework of the projects approved in the three rounds conducted by scientific institutions are market-oriented of selection of project applications of the activity. and are implemented in the practical business. The

For promotion of long-term cooperation between framework of the system of technology transfer provides companies and scientists, implementation of activities for a creation of a two-level transfer system, thereby

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 139 – strengthening the capacity of the state agency both in the and 56 projects have been completed for 74.03 million field of technology transfer and provision of services to euros. The aim of this programme is to raise the potential scientific institutions, and supporting creation of 1–2 of Latvian manufacturing companies to implement technology transfer centres at the level of universities and knowledge or technology in intensive projects, besides scientific institutions. At the same time, knowing the attracting foreign investment in areas with a high value necessity to increase the degree of preparedness of added, and supporting purchase of manufacturing commercialization offers and to promote attraction of equipment, and construction or modernization of licentiates/investors, it is planned to create a fund production units in order to promote creation of new intended specifically for this purpose. jobs.

For the development of innovative companies, Furthermore, implementation of projects within the support measures for projects of such companies were framework of the Programme for Development of New Products continued in 2015, envisaging the development of new and Technologies of Micro, Small and Medium-sized Merchants, products and technologies, and their introduction in the administered by IDAL and co-financed from the EU manufacturing process, as well as having a tendency to structural funds, was continued in 2015. The aim of this develop technologies with reduced impact on the programme is to promote innovation activities of micro-, environment, and to support investment of companies small- and medium-sized enterprises in the area of for the development of new production units. development of new products or technologies, by In 2015, within the framework of the EU structural providing support for the purchase of external services in funds co-financed programme Implementation of New order to conduct research, corroboration of industrial Products and Technologies in Manufacturing, support was rights and certification of a new product or technology. provided to company projects, which provide for the The total financing of the EU structural funds available implementation of new or significantly improved in the programme in the period from the end of 2012 products, technologies or technological processes in the until April 2014 was 2.85 million euros, however, one manufacturing process. Additionally, implementation of beneficiary of the financing was eligible to receive 14.23 115 projects (with the total financing of 36.2 million thousand euros with the maximum permissible financing euros), supported in the first and second round of intensity of 60%. During the programme, 41 project selection of the programme, was continued in 2015, 114 applications were submitted, 22 of which were supported of which (with the total financing of 35.7 million euros) (agreements were concluded) for the total financing of are completed as of 1 May 2015. The main support 0.25 million euros. As of 1 May 2015, 13 of these projects within the programme was provided to medium-sized for the total financing of 0.14 million euros were completed (incl. disbursed financing). enterprises which operate in the manufacturing, where the average amount of support provided within the In the Green Technology Incubator, created within the programme was 0.37 million euros per project. Likewise, framework of the Norwegian financial instrument performance of three agreements concluded within the programme, provision of pre-incubation services to 99 programme Development of New Products and Technologies – business ideas, which were supported in the five rounds Support for Strengthening of Rights for Industrial Property was of project selection, organised in 2014 and 2015, is continued in 2015 with the total amount of financing continued in 2015. At the same time, the Green from the EU structural funds constituting 0.054 million Technology Incubator has started providing incubation euros, where 1 project has been completed with the total services to 10 business ideas in 2015 with the total amount of financing from the EU structural funds amount of allocated financing constituting 1.19 million constituting 0.013 million euros. euros, incubation of which was supported under the In the framework of the EU structural funds co- Small Grant Scheme. Simultaneously, the third round of financed state support programme High Value Added selection of projects was announced (the deadline for investment, implementation of 209 projects supported in applications was 1 June 2015) within the framework of the first, second, third and fourth (took place in 2014) the Small Grant Scheme, thereby providing an opportunity round of selection of project applications was continued for a wider circle of idea developers to receive financing in 2015 with the total financing constituting 205.7 million for commercialization of environmental products, euros. Simultaneously with the decision of the Cabinet of technologies and services. Within the framework of the Ministers on allocation of financing for the fourth round Norwegian financial instrument programme Open of the programme it was decided to increase the support Competition, the process of implementation of 18 intensity for all projects from 35% to 45%, and also an supported company projects is continued in 2015 with agreement was reached that the minimum amount of the total amount of co-financing constituting 7.27 million total eligible costs for one project will be reduced to 50 euros. As a result of implementation of projects, it is thousand euros, whereas the maximum amount of public planned to introduce new products and technologies in financing for one group of related persons of a project the manufacturing process with a reduced impact on the submitter will be increased to 2.13 million euros. By the environment. mid-2015, the implementing parties of projects supported For the sixth year in a row, IDAL has been within the first, second and third round of the continuing the implementation of activities within the programme have received a total of 110.8 million euros, framework of the EU structural funds co-financed

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 140 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY programme Activities for Raising Motivation for Innovations financing of 0.17 million euros is estimated for the and Starting Business (hereinafter — the Motivation implementation of all activities planned in the Programme). The aim of the Motivation Programme is to programme. promote understanding about innovation and business, Starting from 1 July 2014, companies in Latvia can as well as to practically involve different society groups in use the corporate income tax incentive for R&D costs of business activities, and development and further companies, which can be written off in the year when implementation of innovative ideas and solutions. The such costs have occurred, by applying a value increasing target audience of the Motivation Programme includes coefficient of “3”. The tax incentive can be applied to the students and the teaching staff of general and vocational following eligible R&D costs: education institutions, university students, next and – costs of the scientific and scientific technical staff, existing entrepreneurs, developers of innovative ideas, which are related to the research and development individual inventors etc. In 2015, various activities are work performed by a company; implemented for idea developers within the Motivation – costs for research services provided by scientific Programme, for example, support for the co-operation institutions; platform of students and companies DEMOLA is – costs for certification, testing and calibration continued, and also networking seminars are organised when receiving services provided by accredited for business starters and developers. In the first half of certification, testing or calibration institutions. 2015, the work on implementation of the popular competition in Latvia Ideju kauss 2015 has been started, as The R&D tax incentive was introduced according to well as activities are performed for ensuring advice of the amendments made to the law On Corporate Income Tax experienced mentors to new entrepreneurs and support on 6 November 2013. On 1 July 2014, Regulations of the for improvement of business in the framework of the Cabinet of Ministers On Research and Development Activity Mentoring Programme in the second half of 2015. for Application of Corporate Income Tax came into force, In 2015, the activity is continued, during which setting the requirements for compliance and assessment support is available to developers of innovative start-ups, of R&D activity for the calculation of corporate income providing them with the necessary consultations and tax, requirements for R&D project documentation, as knowledge for drafting and implementation of projects, well as requirements for accounting procedure of R&D as well as for the attraction of external financing. By costs and compliance and assessment of R&D costs. In 1 May 2015, consultations have been provided to 11 order to ensure advisory assistance to entrepreneurs and authors of business ideas within the framework of this the State Revenue Service, the Ministry of Economy has activity: consultations have been ensured on drafting a established a Commission for Assessment of Research and business plan, intellectual property, market research and Development Activities, which has a task to ensure marketing, or initial consultations for the development of assessment of activities included in the documentation of industrial design, and also a meeting of authors of a research and development project, and to prepare an business ideas and potential investors was organised in opinion of recommendatory nature on compliance of March 2015. The total financing available in the activities included in the project with the status of Motivation Programme is 3 million euros. In 2015, which research and development activities. is the extension year of the Motivation Programme,

6.10 Information Society

Information society is a stage in the development of reports have been developed. For example, the Information society, which is based on free mutual exchange of Society Development Guidelines for 2014-2020, the guidelines information and develops knowledge-based economy. Latvian Cybersecurity Strategy for 2014-2018, the Guidelines for The information society is formed with the help of the Protection and Ensuring of Intellectual Property Rights for 2015- technological basis (infrastructure, software), a range of 2018, the Development Concept for the State Education information services available to society, as well as the Information System (SEIS), the Concept of the Official Electronic level of skills and knowledge of individuals. Address, the informative report On Secure and Protected The development of information and Circulation of Documents in the Public Administration, the telecommunication technologies (ITT) has resulted in an informative report On Activities for Reduction of the increasingly broader use of information and knowledge at Administrative Burden for Development of Broadband Electronic work, in business communication, in studies, as well as in Communications Network, the informative report on the households (see Box 6.22). conceptual architecture of public administration In the preparation of the new multi-annual budget information systems etc. period (2014-2020), guidelines, concepts and informative

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Box 6.22

The Role of the ITT Sector According to the data of the Central Statistical Bureau of Latvia (CSB), the proportion of the ITT sector in the GDP constituted 3.7% in 2013. In 2013, the ITT sector in Latvia was represented by 5053 companies, which employed more than 23.6 thousand employees. The turnover of these companies exceeded 3.1 billion euros and staff costs constituted 362 million euros. The added value of ITT manufacturing reached 47 million euros, and in the provision of ITT services – 620 million euros. The balance of ITT external trade was negative, constituting -105.9 million euros, because the amount of import exceeded export, respectively, 873.1 million euros and 767.2 million euros. It must be noted that import of ITT products in 2013 increased by 18.6%, and export by 27.1%, compared to the year 2012. According to the data of the survey Use of Computers and the Internet by Households, performed by the CSB, in 2014, 73% of households (households with at least 1 person aged 16-74) had an Internet connection. Most frequently used devices by households with an Internet access were the following: laptops 68%, desktop computers 58%, mobile phones and other mobile devices 37%, other devices 10%. In terms of Internet accessibility, the best situation among households was in the Riga region with 80% and the Pieriga region with 79%, whereas in other regions the situation was worse: in the Zemgale region, 71%, Kurzeme region, 69%, Latgale region, 66%, and Vidzeme region 63%. Computer and Internet were regularly (at least once a week) used by 72% of the population aged 16-74. Broadband Internet connection was available to 98% of households having an Internet connection. In 2014, computers were used by 98% of companies with 10 or more employees, Internet connection was available to 96% of these companies, whereas 56% of these companies had their own website on the Internet. In 2014, 41% of all employees of companies used computers connected to the Internet. At the beginning of the academic year 2013/2014, comprehensive schools used 25.6 thousand computers in their study process, which is approximately one computer per 8 students. Out of 827 schools with Internet connection, 615 schools or 74.4% had their own home page.

The Information Society Development Guidelines for 2014- structural funds as well as the public and local 2020 adopted by the Cabinet of Ministers on government budget funds in the amount of 149 million 1 October 2013, include the results achieved in the euros were acquired. In total, more than 120 projects in previous 7 years and the determined priorities until 2020. various areas of economy were implemented. The The most significant achieved political results are the planned results have not been achieved only in the high number of regular Internet users, the relatively high project Skolas.lv, with the total costs constituting 3.5 proportion of households having broadband Internet million euros, because there has been a lack of connection, the high number of employees using a administrative capacity for qualitative supervision of the computer and the Internet on a daily basis, as well as the project, as well as analogous services have been more relatively high proportion of people who are using successfully provided by several private companies. distance learning services. Whereas, such a political result In the multi-annual budget period (for 2014–2020), it as the determined proportion of the ITT in the GDP is is planned to use the financing of EU structural funds in not achieved, and there is a small number of people who the amount of 192.8 million euros. shop online, as well as a small turnover of companies By implementing activities of the priority direction of achieved from sales on the Internet. the Cohesion Policy ITT Accessibility, E-administration and The guidelines for the new planning period set the Services, it is planned to provide support to promoting a following goals: balanced development in the entire territory of Latvia, − to raise the efficiency of the operation of public creating or improving the infrastructure of electronic administration (by optimizing processes); communication, and simultaneously developing an − to improve the business environment (by environment, which promotes the economic activity and improving the commerce indicators); is based on availability of information, repeated use of − to raise the level of e-skills of the population (by the public sector information, ITT solutions integrated by improving the average level of skills and public and private sectors, and involvement of Latvia in decreasing the proportion of people not using the the European single digital market, as well as Internet); improvement of the overall quality of life of the − to increase Internet accessibility (by increasing population, contributing to the accessibility of services, Internet accessibility to households); raising the productivity of the public, reducing the − to ensure easy access of services in the electronic administrative burden and raising the mobility.

environment (by raising the proportion of the Furthermore, NGOs of the sector take active population and companies, which are using the participation in the formation of information society. In Internet for co-operation with public and local 2012, the Latvian Information and Communications authorities, as well as with medical institutions); Technology Association (LIKTA) developed the Chart on

− to increase the investment in research and Priorities of the ITT Sector specifying 6 target directions for innovation (by increasing the amount of the next 5 years. Whereas, on 9 April 2014, the LIKTA, investment and the proportion of innovative the Ministry of Environmental Protection and Regional companies). Development, “Lattelecom” Ltd, the Latvian Association of Local and Regional Governments (LALRG), the For developing the electronic administration and the Latvian Association of Large Cities (LALC) and the information society, by 2014 the financing of EU

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Latvian Chamber of Commerce and Industry (LCCI) governmental organisations participated in ensuring these signed a co-operation memorandum on the e- activities, involving 23.6 thousand people in the training administration efficiency measurement for national-scale process. public authorities and local governments – the Latvian Since the accession to the EU, the EU initiatives e-index. related to the formation of the information society have In 2013, during the E-skills Week, a co-operation become binding for Latvia. memorandum was signed on the establishment of E-skills In the declaration Digital Agenda for Europe, adopted by Partnership in Latvia. It was signed by representatives of the EC on 26 August 2010 (see Box 6.23), a goal was set the public sector, the ITT sector and NGOs, in response to gain economic and public benefits from the single to the EU initiative the Grand Coalition for Digital Jobs digital market, which is based on fast and ultra-fast Creation. Internet, in accordance with the EU 2020 strategy. The E-skills Week 2015 took place in 88 regions and towns of Latvia. More than 150 public and non-

Box 6.23

Action Plan for the Digital Agenda for Europe Seven priority activities (areas of action) have been determined for the Digital Agenda for Europe: establishment of a single digital market, improvement of main conditions for the interoperability of ITT tools and services, raising of the Internet security and trust of users, faster access to the Internet, more investment in the research and development, improvement of digital skills, abilities and inclusion, as well as adaptation of ITT, in order to solve current societal problems, for example climate changes, health care and ageing of the public. In total, 132 activities are planned in the areas mentioned in the agenda. The following areas are specified in the action plan as particularly supportable: – accessibility to fast and ultra-fast Internet. In order to ensure equal access of electronic communication services in the entire territory of Latvia: a national broadband network implementation plan must be developed and realized, and appropriate legislation, which will facilitate investment in broadband networks, must be implemented, also the financing provided by the EU structural funds (see the section on the broadband Internet) and the Rural Development Fund must be fully used, and the European Radio Spectrum Policy Programme must be implemented; – improvement of digital skills, abilities and inclusion. In order to promote development of the information society by providing an opportunity for the Latvian population to acquire e-skills according to the level of their education and professional activity: a long-term policy for using e-skills and digital means must be implemented, and a respective motivation of SMEs and groups being in an unfavourable situation must be promoted; regulations on invalidity of the telecommunications legal framework and the Audiovisual Media Services Directive must be implemented; e-studies must be integrated in the public education and training modernization policy; – reliability and security. In order to increase the trust of people in using the Internet: the European scale Information Technology Security Incident Response Network (CERT network) must be joined and used; an extensive attack imitation must be performed and the prevention strategy must be tested; a hotline for reporting offensive or harmful content must be introduced, and educational campaigns for children on the Internet security must be organized.

The action plan provides for activities also in other areas of action. In the area of action Digital Single Market: the main directives, which support the single digital market, must be implemented, including the Services Directive, the Unfair Commercial Practices Directive and the legal framework on telecommunications, and also the legislation on the conditions of invoicing must be adapted. In the area of action Interoperability and Standards: the European Interoperability Framework must be applied (also in the field of geospatial information) and the obligations in the area of interoperability and standards, determined in the Malmö and Granada Declarations must be implemented. In the area of action Research and Innovations: by 2020 the total ITT expenses of the public sector must be doubled, by accordingly attracting equivalent private expenses, and participation in large-scale test projects must be taken in order to test and develop innovative and interoperable solutions in areas of public interest. In the area of action Benefits of the EU Society from ITT: the smart meters must be introduced, also agreeing on their additional functions; conditions of total service life costs of the devices must be included in the purchase specifications of the lighting equipment; the interoperability of e-administration services must be improved; compliance of points of single contact with the Services Directive must be ensured; an agreement must be reached on a common list of main cross-border public services; the requirements of the European Railway Traffic Management System must be fulfilled.

In order to assess the results achieved by the Digital Agenda for Europe, in May 2014, the European Commission published the information on the progress in the implementation of the programme since its beginning (Progress Report Digital Agenda Targets 2014). In general, the results can be viewed as positive: the use of Internet has rapidly increased (by 12 percentage points), reaching 72% of the population; the level of online shopping has increased by 10 percentage points, reaching 47%; the high-speed broadband Internet is available to 62% of the population (increase by 33 percentage points), although majority are residing in towns (these indicators are significantly lower in rural regions). The following shortcomings have been identified: the slow increase of using the e-administration (only by 4 percentage points in 4 years), and even falling of this indicator in separate countries; the low increase of e-commerce in the sector of SME, reaching 14% (2 percentage points in 4 years), which is indicated as an obstacle for creating new jobs; the low level of public support for research and development of ITT; and the very slow increase of the cross-border online trade. Unlike the general trends in the EU, Latvia has exceeded the EU average of using e-administration and next generation broadband access network coverage (in towns). The level of digital skills and the proportion of employees in the ITT sector against the total number of employees are slightly below the EU average. However, the increase of e-commerce in the SME sector and the public support for research and development in the ITT sector is not sufficient. In 2013, in comparison to the EU average, the largest difference was detected in the accessibility of the fixed broadband Internet in rural regions (in Latvia, 44%, the EU average 90%), which was partially compensated by the relatively high coverage of the next generation broadband access network (in Latvia, 29%, the EU average 18%).

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Box 6.23 continued

Upon summarizing the results of 2014, the EC has published the Digital Economy and Society Index (DESI 2015), which contains 5 different digital area aspects on all the EU states: (1) compatibility which describes the development of the broadband Internet infrastructure; (2) human capital which describes the different level of e-skills of the Internet users; (3) the use of the Internet which describes the online activities of citizens; (4) integration of digital technologies which describes the digitalization and online activities of companies; (5) digital public services which describes the digitisation of public services (mainly e-administration and e-health).

According to the assessment of the DESI 2015 index, Latvia is positioned among low-performance countries (ranking 18th position in the EU), which are recommended to improve their performance. According to the aspect of the Internet use (8th position) and compatibility (9th position), the indicators of Latvia exceed the EU average, whereas the indicators of human capital (20th position), digital public services (20th position) and integration of digital technologies (28th position) aspects are lagging behind. Compared to DESI 2014, the number of the Internet users has slightly increased in Latvia, the e-skills of the Internet users have improved, and also the range of digital public services has been extended, however, the share of SMEs selling goods online and also the e-commerce turnover have decreased. Furthermore, the use of such digital technologies as the electronic information exchange, cloud computing services, use of social networks, which is necessary in the digital economy, is expanding very slowly in Latvia.

In the first half of 2015, Latvia was the presidency Employment, the Single Market Forum, the Riga Summit 2015 state of the Council of the European Union. One of the on the multilingual single digital market, the conference three priorities of the Latvian presidency was the creation SEMIC 2015, the conference CONTACT RIGA 2015, of a truly digital Europe, paying special attention to the conference Role of ITT for Accessibility of Information in raising trust in the Digital Single Market, digitalization of the Study Process, the Digital Assembly 2015 etc. the public sector, as well as promotion of security in the On 6 May 2015, the EC in the European Digital Single digital environment. Market Strategy determined 16 basic activities within the During the Latvian presidency, Riga hosted such framework of three pillars, which must be implemented significant events as the conference Open Europe: Open by the end of 2016 (see Box 6.24). Data for Open Society, the conference E-skills for

Box 6.24

EC Communication on European Digital Single Market Strategy

Pillar I – better access to digital goods and services for consumers and companies around Europe This pillar includes basic activities, which will facilitate the cross-border e-commerce (by coordinating the regulations on agreements and protection of consumers), ensure better protection of consumers (reviewing the Regulation on Cooperation in the Area of Protection of Consumers Rights), achieve more efficient and accessible (in terms of price) delivery of parcels, prevent unjustified blocking of consumers due to their geographical location, determine competition problems of the e-commerce market (launching the anti-monopoly competition investigation in the e-commerce sector of the EU), develop draft laws for coordination of copyright regimes among countries, increase cross-border accessibility to broadcaster services in Europe (by reviewing the Satellite and Cable Directive), decrease the administrative burden (faced by companies due to differences in the VAT regimes).

Pillar II – creation of appropriate conditions and equal conditions of competition for the development of digital networks and innovative services This pillar includes basic activities in the area of telecommunications, which should improve the coordination of radio frequencies spectrum at the European level, promote investments in the high-speed broadband and ensure equal competition for all market participants (by performing an extensive reform of EU regulations on telecommunications), review audiovisual media sources (by adapting the Directive on Audiovisual Media Services), analyse the role of online platforms on the market and the capacity to fight against illegal content, strengthen the trust in digital services (by reviewing the E-privacy Directive), and co-operate with the sector concerning the cybersecurity issues.

Pillar III – maximum use of the digital economy growth potential This pillar includes basic activities, which should promote free data circulation in the EU (by proposing the European Initiative for Free Flow of Data and the European Cloud Computing Initiative), improve the standards and interoperability in the e-health, transport planning, power industry (smart measuring) and other areas, support an inclusive digital society (by improving skills, developing an e- administration action plan for connecting registers of enterprises in the EU, and speeding up the implementation of e-purchases and interoperable e-signatures).

Electronic Services Since 2012, Latvian inhabitants can receive electronic The single point of contact of Latvia for access to identification cards (eID), which are equivalent to a public and local government services, which is also a part passport and, at the same time, is a secure carrier of the of the European “EUGO” network of e-administration electronic signature (it includes 120 free time stamps for Internet portals, is the Internet portal www.latvija.lv. By signing documents with a secure electronic signature). 2015, it is planned to improve this portal in compliance In order to encourage people to use electronically with the general guidelines of the European E- signed documents more actively, at the beginning of administration Action Plan 2011-2015. 2015, the e-environment was promoted within the

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 144 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY framework of several informational campaigns and project is implemented by the State Joint-Stock Company advisory activities. According to the data of the Register “Latvia State Radio and Television Centre” (VAS of Enterprises, in the five months of this year, the “Latvijas Valsts radio un televīzijas centrs”), creating 177 number of electronically submitted documents has Internet access points and installing optical cable routes increased by 76%, compared to the corresponding period with the total length of 1866 km, which will allow to in 2014. provide people and companies with qualitative Internet, On 4 October 2014, prior to the 12th Saeima with the speed from 30 to 100 Mbit/s, and will reduce elections, the issue of electronic voting possibilities was the digital gap among urban and rural areas. In the brought to the forefront. Taking into consideration that second stage of this project, it is planned to continue the the only identity document of a part of Latvian citizens construction of new access points and installation of (27.5 thousand) was the eID card, in order to participate optical cable routes. Completion of the second stage is in the elections, these people had to receive a single planned by the end of 2018. The planned financing voter’s card, issued in the departments of the Office of constitutes 92.5 million euros, 78.7 million euros of Citizenship and Migration Affairs, however it was taken which is the financing of the EU structural funds. out only by approximately 20% of citizens. Prior to the In order to determine further directions for the Saeima elections, the initiative Elections on the Internet was development of a next generation electronic submitted to the Saeima, however, on 4 December 2014, communication network, on 7 December 2012, the the Saeima adopted a decision to reject this initiative, Cabinet of Ministers supported the first solution versions justifying this decision with the lack of appropriate and offered by the Next Generation Broadband Electronic secure technological solutions. Communication Networks Development Concept for 2013–2020, Significant savings of human resources, time and which determines further development of main networks, money (approximately 10–20%) is ensured by application development of new points of optical access to the of the Electronic Purchase System, which is mandatory for Internet in rural municipalities (for 281 territorial units), public authorities. According to the data of the State attraction of new electronic communications merchants Regional Development Agency, in 2014, public and local for network development, development of a state aid government authorities have acquired goods in the programme for the creation of subscription lines (“the Electronic Purchase System for 45.9 million euros (in 2013, last mile”), and other activities. 31.1 million euros). A major part of these purchases was In order to promote the provision of private comprised of purchases of hardware and software, investments in the 4G network development, the major medicinal products, accessories of printing equipment, and investors were granted corporate income tax incentives. stationery. On 21 May 2013, the Cabinet of Ministers supported the According to the Eurostat data, in 2013, 17% of granting of corporate income tax incentives to “Latvijas Latvian companies (excluding the financial sector) with Mobilais Telefons” Ltd for the implementation of the 10 or more employees, used the Internet for offering investment project Development of Next Generation Mobile goods or services in the electronic purchase system for Communications Network in Less Densely Populated Areas of public authorities in Latvia (the EU average is 13%) and Latvia, and on 26 November 2013, the Cabinet of 6% in other EU Member States (the EU average is 2%). Ministers supported the granting of corporate income tax

Broadband Internet incentives to “Bite Latvija” Ltd for the implementation of According to the Eurostat data, at the end of 2013, the investment project Development of the BITE 4G Network Outside the Major Cities of Latvia. 97.4% of all Internet connections in Latvia offered broadband Internet speed (the EU average is 97.3%). The Combating Computer Piracy speed of 50.8% of all broadband connections was above According to the data of the international software 30 Mbit/s (the EU average is 21.2%) and 35.6% even protection organisation “Business Software Alliance” exceeded 100 Mbit/s (the EU average is 5.3%). (BSA), in 2013, the level of computer piracy in Latvia According to the data, published by the Internet reached 53% (the average in Central- and Eastern research company “Ookla Net Metrics” on the Internet European countries is 61 per cent). The losses caused to speed measuring website speedtest.net, in mid-May 2015, the Latvian economy by computer piracy constituted 39.6 among 200 of the world’s countries, Latvia was ranked million euros. 15th and 10th, with the download speed of 45.9 Mbit/s, The latest study conducted by BSA – EU Cybersecurity and the upload speed of 38.8 Mbit/s, respectively. Dashboard – has compared the activities of EU Member On 9 November 2011, the EC, in compliance with States in the field of cybersecurity. Latvia has not been the EU public aid regulations, approved an aid package indicated among the problem countries in this study, worth 101.7 million euros, aimed at extending the ultra- because the relevant legislation has been adapted and, in high speed broadband Internet network in Latvia. 2014, the Latvian Cybersecurity Strategy for 2014-2018, which From October 2012 until the end of August 2015, by provides for implementation of certain activities, was using ERDF funding of 23.1 million euros and private approved. It is indicated that the Latvian cybersecurity funding of 3.4 million euros, it is planned to implement strategy formally intends to implement a public and the first stage of the project Development of Next Generation private partnership in the area of cybersecurity, however, Electronic Communications Networks in Rural Regions. The it is not implemented yet (similar to most EU countries).

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E-commerce or services by using the Internet or other computer According to the data of Eurostat, in 2014, goods or networks (the EU average is 38%). Whereas, 9% of services were bought online by 34% of the Latvian companies (excluding the financial sector) with 10 or population (the EU average is 50%), whereas goods or more employees have sold goods or services by using the products from other EU countries were bought online by Internet or other computer networks in 2014 (the EU 16% of the Latvian population (the EU average is 15%). average is 18%). The e-commerce turnover constituted In 2014, 32% of companies (excluding the financial 8% of the total turnover of these companies (the EU sector) with 10 or more employees have purchased goods average is 15%).

6.11 Competition Policy

The goal of the competition policy is to ensure an Protection and Control of Competition opportunity for each company to work in conditions of The CC protects competition, turning against free and fair competition, as well as to promote infringements of the Competition Law – forbidden competition development in all sectors of economy in agreements and abuse of the dominant position – and the public interest. Competition promotes development controlling mergers of large companies. of each individual company and economy, and ensures The priority of the CC is to detect and prevent the lower prices, a wider choice, better quality and innovative most severe infringements of the Competition Law – such solutions for consumers. forbidden agreements and abuse of a dominant position The authority responsible for the implementation of which pose the greatest harm to markets, competition the competition policy is the Competition Council (the and consumers. CC); it investigates and prevents infringements of According to the Competition Law, any such competition rights, makes sure that the state and local agreements between companies are forbidden, the aim or government normative enactments do not create consequences of which include restriction of unjustified obstacles to free and fair competition among competition. Thus, for example, it is forbidden for companies, and educates the representatives of companies to set a price level for similar goods, on companies, the state and local governments, thereby division of the market in order to avoid competition in promoting their understanding about competition rights the same territories, on participating or, on the contrary, and intolerance towards infringements of these rights. not participating in public procurements and other The main directions of operation of this authority is activities, which lead to a competition between the protection and control of competition, prevention of companies that is beneficial for consumers being infringements, as well as development of the competition replaced by forbidden cooperation. culture, helping to create a favourable environment for fair competition among companies.

Box 6.25

A Cartel has been Revealed Maintained for at least Five Years by the Official Volkswagen dealers The CC adopted a decision to impose a fine on the official dealers and the importer of Volkswagen for entering a forbidden agreement, because for at least five years these companies systematically coordinated their participation in procurements, thereby eliminating mutual competition, deforming the supply and preventing customers from purchasing Volkswagen cars on better conditions. Six companies – SIA “SD AUTOCENTRS”, SIA “RIPO AUTOCENTRS”, SIA “MOLLER AUTO KRASTA”, SIA “MOLLER AUTO VENTSPILS”, SIA “MOLLER AUTO LATVIA” and SE “MOLLER BALTIC IMPORT” – were imposed a fine in total of 7.6 million euros for participating in the infringement. One company was fully released from punishment within the framework of the tolerance programme, because the information provided by it allowed the CC to reveal the infringement. The CC found that these companies had mutually agreed not to compete in procurements. For example, these companies have allowed a pre-selected applicant to win in a procurement, whereas other have submitted agreed upon and less beneficial offers to the customer, or have refused to participate in the procurement at all. The dealers have informed each other on a regular basis about their plans concerning any procurement, requesting other parties not to compete by waiving participation or avoiding to offer lower prices. Whereas the car importer in Latvia – the wholesaler SE “MOLLER BALTIC IMPORT” – was not only aware of the existing market division among the dealers and did not object it, but also to some extent promoted and supported such infringement, by acting as an intermediator for information exchange. Although it is impossible to gather information about the exact number of suffered parties which have overpaid as a result of the cartel activities, it is clear that it is very high as the infringement lasted for a long time and new Volkswagen cars are among the most popular in Latvia. During the investigation, the CC obtained information about mutual correspondence among the cartel participants concerning procurements made by private companies, state administration authorities and agencies, as well as municipalities, schools (school buses), old people's homes, authorities of the interior, etc.

In the first half of 2015, the CC investigated nine between companies. In the same period, the CC cases on possible forbidden agreements concluded informed the public on the most extensive forbidden

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 146 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY agreement recently detected in Latvia – a cartel between companies on the market if they abuse their power on the official dealers of new Volkswagen cars in Latvia (see the market. Abuse of their dominant position is Box 6.25). This is the second infringement to date in forbidden to large companies according to the Competition Latvia which has been detected following a report filed Law. In order to solve less serious infringements as fast within the tolerance programme. and efficient as possible, the CC can operate as a Similar to forbidden agreements, a significant harm to mediator in negotiations between companies (see competition and consumers can be caused by dominant Box 6.26).

Box 6.26

The CC Mediates to Prevent an Infringement by a Waste Management Company Upon a warning by the CC, the waste management company SIA “Eco Baltia vide” changed the provisions of the agreement on the provision of additional services, because some customers were forced to pay for services which they did not use, due to unclear wording of agreement conditions. The CC started negotiations with SIA “Eco Baltia vide” after receiving the submissions of customers of “Eco Baltia vide” — SIA “RavLat Group” and SIA “Tukuma Auto”. As a result of a procurement, “Eco Baltia vide” had obtained the rights, for a period of five years, to be the only household waste manager in the Adazi region and the Piejura region. In addition to basic services of waste collection, on the provision of which the municipality had concluded an agreement with the waste management company, the company was entitled to conclude individual agreements with customers on the provision of additional services, for example, more frequent waste collection. Due to the unclear wording of the agreement, customers had, in addition to the agreement with “Eco Baltia vide” on basic services, concluded an agreement on additional services, however, they had not understood that they will have to pay for these additional services each month irrespective of whether they have used them or not. Having assessed the conditions of additional services, the CC concluded that the conditions are ambiguous and show willingness to unfairly sell the additional services together with the basic service, thereby gaining extra income. Such conduct of the company may be considered as an infringement of competition law. To prevent the harm caused to consumers as quickly as possible, the authority requested “Eco Baltia vide” to change the provisions of the agreement on additional services, initially without opening a case on infringement. The company admitted that the conditions of the agreement are ambiguous and changed them, as well as provided an option for customers to withdraw from this agreement.

In order to prevent significant weakening of granted a permit to perform the planned transaction, competition as a result of mergers of companies, the CC however, in one instance, the merger participants, in performs the control of mergers of large companies, by order to complete the merging process, are required to allowing only those merging transactions, which do not observe binding conditions applied by the CC, which pose harm to the market. Furthermore, by allowing a prevent potential harm caused by the merger to merger, the CC is entitled to apply binding conditions to competition. the merging companies, which prevent potential harm If companies merge without receiving a permit from caused by the merging. According to the Competition Law, the CC, the state cannot perform its obligation to protect receiving a permit from the CC is required in cases when competition on the market, and irreversible harm can be the total turnover of the merger participants in the done to the structure of competition. Therefore, a fine is territory of Latvia in the previous accounting year has imposed on companies if they fail to give a timely notice been at least 35.6 million euros or if the total market on merging. One such merger of companies without share of the merger participants exceeds 40%. notice was detected also at the beginning of 2015 (see In the first half of 2015, the CC has examined seven Box 6.27). merger transactions. In all cases, companies have been

Box 6.27

CC Punishes Fuel Traders for Failure of Merger Notice The CC imposed a fine of 104.4 thousand euros on “LUKoil Baltija R” Ltd and “Akselss” Ltd for the failure of giving timely notice on merging. The cooperation between “LUKoil Baltija R” Ltd and “Akselss” Ltd developed under a franchise agreement and, starting from December 2010, “LUKoil Baltija R” Ltd and “Akselss” Ltd covertly started to operate as one company — “LUKoil Baltija R” implemented a unilateral decisive influence on “Akselss” Ltd. The companies submitted the merger notice to the CC only at the beginning of 2015 — after the CC had paid particular attention to the operation of these companies. The fine imposed on the companies is the largest fine imposed by the CC for this type of infringement. At the same time, in calculating the extent of fine, the CC took into consideration that the companies provided the required information about the merging and concluded an administrative agreement with the authority according to which the company has already paid the imposed amount of fine into the state budget. During the assessment of the already performed merger, the CC concluded that it does not pose harm to competition and, accordingly, is permissible.

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One of the most important tools for control and Development of Competition Culture promotion of competition is market supervision or in- To promote competition in all sectors of economy, depth competition situation analysis, conducted by the the CC helps to eliminate and prevent administrative CC in one particular market. The market supervision obstacles to free competition and educates entrepreneurs allows the authority not only to detect and prevent and the general public about competition rights and the infringements of the Competition Law, but also to find the role of competition in ensuring the public well-being. existing administrative obstacles, develop and submit to The CC also co-operates with competition supervisors responsible institutions suggestions for improvement of and international organisations of other states, thereby the competition situation, and to inform society about participating in the formation of the international the competition situation on specific markets. competition policy and using the information and Supervision of the electricity market is among the most experience shared by other states to ensure efficient significant market supervision activities completed in the protection of competition in Latvia. first half of 2015 resulting in a conclusion made by the To reduce administrative obstacles, which may arise CC that the opening of the market for competition to free competition of companies due to normative acts, generally can be assessed positively, however, for the CC examines draft normative acts and gives its successful further development of the market it is opinion, if it concludes that the normative act can cause necessary that consumers use their rights to choose the unjustified harm to competition and, respectively, it must best offer as actively as possible, thereby promoting be corrected. Thus, in 2015, the CC got actively involved competition. Whereas, to expand the supply and make it in preventing the inclusion of competition-distorting more beneficial, the state has to maintain an environment amendments in the Waste Management Law. To in which companies will be able to operate under demonstrate the potential harm of these amendments, conditions of equal and fair competition. the CC has developed a special infographic (see Figure 6.15). Figure 6.15

Consequences of Amendments to the Waste Management Law

After amendments made to the law Consequences private waste management the waste management companies are forced to  company is chosen by the the municipality chooses  leave the market municipality the waste management consumers company for everyone

 47% of municipalities prices are increasing and quality becomes lower across choose waste management in 47% of municipalities

 companies without a competition will be  the country without small procurement eliminated competition

enterprises  in the remaining 53% of companies choose their due to the lack of supply, municipalities waste management increasingly more competition is possible company themselves municipalities are forced to only during the  create their own waste  procurement procedure large  management companies – there is competition even once in 7 years enterprises the market becomes when the municipality does not ensure it nationalised and stagnates

The CC pays special attention to informing and Seminars were also organised for the employees of educating the public, thereby promoting intolerance the criminal police and specialists from the Consumer towards infringements of competition rights, and Rights Protection Centre, thereby strengthening mutual eliminating instances when companies violate the law due co-operation in detecting and investigation of to ignorance as much as possible. To explain to different infringements. target audiences the aspects of application of By strengthening the principles of good management, competition rights which are significant for them, the CC the CC developed the Guidelines for the Oral Hearing has organised seminars, conferences and other activities, Procedure, thereby setting the standards for opportunities which allow to meet with audiences, speak about current of companies to express their opinion on infringement issues and answer questions. The seminar for case materials available to the CC, before the authority entrepreneurs in Cesis is among the major activities, as has adopted the final decision. well as participation in two conferences dedicated to The first half of 2015 has been particularly active for competition in the area of procurements and the car the CC in the field of international co-operation. Within sector. the framework of the Latvian Presidency of the Council

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 148 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY of the European Union, the CC of Latvia organised the issues in combating cartels and the procurement power conference of the European Competition Day. This of large retailers. event allowed meeting the world’s leading competition In continuation of the co-operation traditions of law experts, representatives of EU competition Baltic competition authorities, the annual Baltic supervision authorities, Latvian entrepreneurs, non- Competition Conference took place in Riga on 8 May. In governmental institutions and state administration this conference, representatives of national competition authorities, as well as judges and lawyers specialised in authorities from Latvia, Lithuania, Estonia, as well as competition rights. The conference Wider Opportunities for Finland, Austria, Sweden, Germany and Poland More Efficient Protection of Competition was dedicated to discussed the current issues concerning investigation of three central issues which are important for the majority infringements and operation of authorities, shared their of the EU member states — ensuring equal conditions experience and established further co-operation for companies of private and public persons, current opportunities.

6.12 Policy for Export Promotion and Attraction of Foreign Investment

To achieve the Latvian “economy breakthrough” ensure changes of the economy structure in favour of included in the National Development Plan and successfully external demand oriented1 sectors, especially in sectors implement goals mentioned in the National Guidelines of that are defined as medium-high and high technology Industrial Policy (see: Section 6.3), the meeting of the sectors2. Cabinet of Ministers of 28 May 2013, supported Guidelines FDI is significant for the promotion of further for the Promotion of Export of Latvian Products and Services and growth of Latvian economy both through acquisition of Attraction of Foreign Investment in 2013-2019. various manufacturing and management skills, and with Boosting competitiveness of Latvian companies, creation of new jobs, which provides an opportunity to targeted activities for the attraction of foreign direct use new technologies and preconditions for technology investment and supporting merchants for acquiring transfer, promotes integration of the state in the external markets are the main directions of conduct international trade and involvement of companies in the mentioned in the guidelines, which will ensure the chains of production sales. development of Latvia as a beneficial environment for The priority in the process of attracting foreign investment, will promote its recognition at the investment must be the geographically closest international level, and will help Latvian companies to neighbouring countries where Latvia is recognized and enter external markets. no additional resources have to be invested for These guidelines define the main goals, principles and informational activities, economically stable and directions of operation for the policy of export and developed countries where the development potential promotion of foreign direct investment (FDI) attraction and needs of economy sectors are relevant for for the next seven years. For successful implementation perspective co-operation opportunities with Latvia, and of guidelines, it is important to create a unified and countries with the globally largest investment outflows dynamic co-operation model of all parties, to include (the USA, France, Germany, the United Kingdom, Japan, public and municipal institutions, the private sector and China, Russia, India). scientific institutions. In order to successfully compete on the investment Specific measures in these directions of operation are attraction market and to improve the progress of local implemented in compliance with the Plan for Tasks and and foreign investment projects which are important for Activities Provided for in the Guidelines for Promotion of Export the state, starting from 2010, the IDAL has been of Latvian Products and Services and Attraction of Foreign implementing the investment attraction methodology Investment in 2013-2019, which is added to the document Polaris, which provides for a unified and coordinated of guidelines. conduct of ministries, local governments, infrastructure companies and public companies in the implementation Attraction of Foreign Direct Investment The FDI attraction policy is aimed at raising competitiveness of Latvia as an attractive environment 1 External demand oriented sectors: agriculture, extractive industry, for investment, taking into consideration the aspects manufacturing, transport and storage, information and which are significant for investors: macroeconomic communication services. 2 Medium-high and high technology sectors: procuction of indicators of states, business environment – simplicity of pharmaceutical products, computers, electronic, optical equipment, bureaucratic procedures and a stable tax policy, aircraft and its equipment, and medical instruments, as well as availability of adequately qualified workforce, market production of chemical substances, weapons, electric equipment, potential, accessibility of the necessary infrastructure, mechanisms and working machines, automobiles, ships, railway and other types of transport (excluding aircraft) and repairs and support instruments and incentives offered. It is installation of equipment and devices (NACE version 2 20, 25.4, 27, important to attract foreign investment in sectors, which 28, 29, 30 (excluding 30.3), 33)

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 149 – of strategically important local and foreign investment investments constituting 285.7 million euros. The projects, as well as involvement of the private sector, majority of them or 23 of 25 supported investment universities and scientific institutions. projects will be implemented in the manufacturing sector, To concentrate the available resources in a targeted whereas two investment projects — in the sector of manner and increase return from them in the attraction information communication technologies. of FDI they include basic principles for further conduct: More detailed information about the attracted foreign – extended and active methodology for the direct investment is provided in Section 4.3.3 of the attraction of FDI – the POLARIS process, report.

according to which further activities related to the Export Supporting Instruments attraction of investment are implemented; Latvian exporters have access to a wide range of

– marketing activities for the attraction of direct services for supporting export, which include investment. consultations on issues related to export, among them consultations on foreign markets, specific trade Taking into consideration the limited resources, requirements and searching for business partners. In focusing of activities towards small number of target addition, seminars about export skills and informational countries (Nordic countries, Germany, the United seminars about external markets are organised, and Kingdom) and specific target sectors (metal processing identification and promotion of export and investment and mechanical engineering, wood processing and projects is implemented. information technologies, including the creation of To promote external competitiveness of Latvian shared service centres) is planned for attraction of FDI in companies, the IDAL has organised 37 trade missions in 2013-2015. 2014, involving 201 entrepreneurs, and 11 delegations of Along with the existing tax incentives, in order to entrepreneurs in the framework of visits of senior promote investing activities and create an attractive officials and intergovernmental commissions established environment for business in Latvia, the Cabinet of abroad, with the participation of 302 entrepreneurs. Ministers approved Regulations on the Sub-activity “Support During this period, 17 national sectoral stands have been for Creation of Jobs” of the Addition 1.3.1.1.6 of the Operational organised for international exhibitions abroad, and Programme “Human Resources and Employment” on support is provided for participation of 62 Latvian 13 March 2013, focusing on increasing the number of companies in 30 international exhibitions abroad. well-paid jobs and growth of the value added and export. Furthermore, 66 individual business visits abroad have Currently, implementation of six supported projects takes been organised and 616 consultations on external place with the total project expenses constituting 24.4 markets, and searching of business partners have been million euros, where the financing of the EU structural provided for Latvian entrepreneurs. Implementation of funds is equal to 6.5 million euros, and it is planned to the above-mentioned activities is also continued in the create 863 new jobs. Four supported projects are related first half of year 2015. to combined administrative office services, one project Latvian external economic representations and the application is received from a producer of plastic IDAL provide services to merchants using the “one stop packaging, and one from a car producer. Currently, the shop” principle, thereby these representations ensure projects are being implemented, and 466 new jobs have individual business visits for entrepreneurs, provide been created within the framework of these projects by support for participation of companies in international 31 March 2015. exhibitions abroad, process export requests and projects, To promote investment attraction, the Saeima and ensure processing of requests for consultations and adopted amendments to the Law on Corporate Income Tax information in the area of attraction of foreign on 6 November 2013, which suggest extension of the investment. state support programme Tax Privilege for Initial Long-term Use of export supporting instruments is continued in Investment Made in the Framework of Project of Supported 2015 for mitigation of negative consequences of embargo Investment until 31 December 2020, at the same time for import of food products, introduced by Russia, by increasing the minimum required sum of investment to providing merchants with the support in acquisition of 10 million euros. In order for entrepreneurs to be able to new markets. submit investment project applications for receiving In 2014, operation of Latvian external economic support in 2015, the Cabinet of Ministers approved representations was ensured in Belarus, Denmark, amendments to Regulations of the Cabinet of Ministers France, Japan, Russia, China, Germany, Lithuania, the of 24 January 2012, Procedure for Approval and Implementation Netherlands, Norway, Poland, Sweden, Ukraine, and the of Supported Investment Project on 19 May 2015, expressing United Kingdom, whereas in the first half of 2015, these Regulations in a new version and providing that the temporary representations were opened in Azerbaijan, legal framework included in this version is coordinated Finland, Italy, Kazakhstan, China (the second with the new EU-level legal framework for state support, representation in Shanghai in addition to one existing in which came into force on 1 July 2014. By Beijing), Singapore, and the UAE for mitigation of 31 December 2013, the Cabinet of Ministers has consequences of the import embargo introduced by supported 25 large investment projects with the total Russia. These representations provide support to Latvian

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 150 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY commercial companies in creating and maintaining products to the Chinese market. Henceforth, only business contacts, and for implementation of external exchange of certificates will be required to start trading marketing activities, and also to provide consultations on and no additional agreements have to be signed, except market requirements of respective foreign countries. an approval from the Chinese counterpart has to be From 24 November until 10 December 2014, Latvian received, which takes place after verification of Days in Georgia, from 17 November until companies. In April 2015, the Certification and 16 December 2014, Latvian Days in Japan, and from Accreditation Administration of the People’s Republic of 15 January until 15 February 2015, Latvian Days in Finland China published on its homepage the list of 10 Latvian took place, organised by the IDAL. Activities of Latvian food product producers, which are allowed to export Days include presentations of company products, several types of milk products to China, for example, marketing campaigns, forums, cooking master classes and cheese, milk powder, sour cream and ice cream. In order other activities, which promote recognition of products to promote growth of export (especially to countries with of Latvian companies in the target countries. a high level of risk) and expansion of export markets (the Under the activity Business Support Activities within the CIS region, rapidly growing economies etc.), and to EU Structural Funds Operational Programme for 2007-2013 strengthen the position in the existing export markets, Business and Innovations the activity 2.3.1.1. Acquisition of short-term export credit guarantees are available, as External Markets – External Marketing is being described in more detail in Section 6.8. implemented. In this activity, merchants are provided To supplement the range of insurance instruments with extensive support for implementation of external available on the financial market and to promote marketing activities: participation in exhibitions, fairs, development of export-oriented companies, the Ministry trade missions, organisation of seminars and conferences, of Economics plans to develop a medium and short-term and, since November 2014, also for the assessment of credit guarantee programme in 2015. The programme conformity of production units and products with the and its implementation model will be developed in requirements determined in the target markets. 654 accordance with the results of market research, as well as project applications have been assessed in 2014. taking into consideration the experience of other

Since July 2014, when the General Administration of countries in implementation of insurance instruments, Quality Supervision, Inspection and Quarantine of China and results achieved by them – impact on the flow of accepted the dairy certificate submitted by Latvia, Latvian export transactions and, consequently, on the dairy processors are given an opportunity to export their development of export-oriented companies.

6.13 Consumer Protection and Market Surveillance

The consumer protection system in Latvia undergoes According to its mandate, the Latvian Presidency continuous consolidation and development to ensure started negotiations with the European Parliament and efficient market surveillance and consumer protection. the EC at the beginning of 2015. Four informal trialogues The Ministry of Economics is working to improve and were conducted during the Latvian Presidency of the develop the existing regulation and to ensure a high level Council of the European Union, which resulted in a consumer protection. (provisional) political agreement between the Council, the Measures in the Area of Consumer Protection EC and the European Parliament on the text of the during the Latvian Presidency of the Council of the proposal for the directive. On 28 May 2015, the European Union Competitiveness Council of the Council of the European On 9 July 2013, the EC approved the proposal for the Union received support of the Member States for the Directive of the European Parliament and of the Council proposal for the Directive, according to the content of the on package travel and assisted travel arrangements, the political agreement. purpose of which is to improve the operation of the The Directive will improve the rules with regard to internal market and to achieve a high consumer purchasing, execution of package travel and assisted protection level by approximating rules for package travel travel arrangements and the liabilities arising from the services. The proposal for the directive was discussed at agreements concluded between holidaymakers and the expert level in the Working Party on Consumer service providers (organisers, wholesalers, traders). The Protection and Information of the Council of the renewed Directive will extend the current protection for European Union (CONSOM) and during the Italian traditional package travels (with regard to various kinds Presidency of the Council of the European Union. In of combinations of travel services), as well as support December 2014, the Competitiveness Council of the those travels and packages, which are combined and Council of the European Union approved the General purchased online (dynamic packages, assisted travel approach on the proposed Directive, thus certifying its readiness arrangements). to start negotiations with the European Parliament and the EC on the text of the Directive.

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Box 6.28

Improvement of the Regulatory Framework Amendments to the Unfair Commercial Practice Prohibition Law, the Advertising Law and the Latvian Administrative Violations Code will enter into effect on 1 July 2015, thereby extending the authority of the CRPC and other supervisory authorities in cases of unfair commercial practices, as well as increasing the maximum fine for unfair commercial practices. The amendments to the laws have been developed to motivate businessmen to use fair commercial practices and to observe the requirements set for advertising, at the same time providing enterprises with the possibility to voluntarily eliminate violations without the application of penalties. Today, the regulation in force is not sufficiently efficient to deter offenders from prohibited commercial practices, because it is more advantageous to pay a fine rather than implement decisions of a supervisory authority and stop using unfair commercial practices. To reverse this situation and ensure a more efficient consumer protection, the maximum fine envisaged for prohibited commercial practices is up to 100 000 euro. If any offender continuously does not fulfil decisions taken by the supervisory authority or a significant harm to consumers is found, supervisory authorities will be able to restrict or close the operation of the electronic tool (such as a website or a domain name) of the user of unfair commercial practices, as well as to suspend the operation of the user of unfair commercial practices or his/her company (business unit). Directive 2014/17/EU of the European Parliament and of the Council on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 entered into force on 4 February 2014. The Directive prescribes to set requirements for advertising of mortgage services, the information to be provided before the conclusion of the agreement, the assessment of consumer’s creditworthiness, the calculation of the annual percentage rate of charge, early repayment of credits, access to creditworthiness assessment databases, as well as a supervision mechanism for credit intermediaries and creditors and competence requirements of these service providers. On 11 July 2014, the Ministry of Economics created a working group for the development of a Draft Consumer Crediting Law. The working group includes representatives of sectors, non- governmental organisations protecting the interests of consumers, and representatives delegated by the involved public authorities. The deadline for the implementation of the Directive is 21 March 2016. On 28 May 2015, the Saeima adopted an Amendment to the Consumer Rights Protection Law, which prohibits concluding credit agreements from 23.00 to 8.00 in the morning, restricts the total cost of the credit to the consumer (0.55% from 1 to 7 days, 0.25% from 8 to 14 days, 0.2% from 15 to 30 days, 0.25% over 30 days), restricts repayment the credit in one payment, if it is longer than 30 days, restricts the growth rate of the interest rate (36% per year above the loan rate), restricts all credit-related costs to 100% from the amount of the issued credit and prohibits to use a promissory note as a payment tool. The nature of these amendments is that interest, incl. late fees, the cost of extension of the credit maturity and other credit-related costs will not be able to exceed 100% of the amount of the initially granted credit. This restriction will ensure that consumers do not become subjects of an excessive and constantly growing debt. The restriction of the total cost of the credit will ensure that consumers, who diligently repay their credits within the set deadlines, do not overpay for the borrowed amount, by covering credits of those consumers who do not repay them, and, in conditions of limited profit, creditors will be forced to use a stricter approach when assessing solvency of consumers and will not issue credits to those whose solvency is insufficient. The restriction to repay the credit in one payment will ensure that consumers will be given credit repayment schedules, which will increase the possibility that credits are repaid on time. The restriction on late fees will ensure that late fees will grow slower, so that in cases, when a consumer has delayed a payment, they would be able to pay it and cover their payment commitments towards the creditor. The law will enter into force on 1 January 2016. The Law on the Credit Information Bureaus entered into effect on 1 January 2015 and promotes wider availability of credit information for the purposes of assessment of creditworthiness. The purpose of the Law on the Credit Information Bureaus is: (1) to reduce the credit risk and to promote wider availability of the credit risk related service; (2) to promote responsible and fair undertaking of commitments; (3) to ensure more effective availability of credit information and to improve management of the credit risk. The Law sets rules for operation of the credit bureau and processing of credit information, periods of storage of credit information, as well as rules of issue of credit information and responsibility for the processing of credit information. A licence, which is issued by the Data State Inspectorate, should be received to start operations of a credit information bureau. Operations of a credit bureau include data processing which allows economic operators to assess creditworthiness of potential customers before concluding an agreement. It also collects information on undertaken payment obligations (fulfilled and unfulfilled), as well as information from respective National information systems, which can be valuable for the assessment of creditworthiness.

The new rules will not only ensure a transparent, harmonised rules with regard to holidaymaker protection understandable set of rules, but will also significantly if service providers become insolvent. The new rules will strengthen the consumer protection with regard to travel not only benefit EU holidaymakers, but also the travel services. The most significant benefits are improved industry in general: firstly, by getting rid of old problems information provision requirements, rules which will (such as the obligation to provide the holidaymaker with promote provision of transparent information about a hard copy of a printed brochure), secondly, by creating prices of services, thus eliminating the risk of unfair uniform, transparent rules in the EU, which will not only commercial practices, improved trip cancelling rights, promote cross-border trade, but also improve co- stricter requirements with regard to the responsibility of operation, thus providing more possibilities to organisers when something goes wrong during any trip, enterprises, especially taking into account the needs of higher holidaymaker protection in case of unpreventable SMEs. and unexpected circumstances, and more effective and

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Box 6.29

Improvement of Resolution of Individual Consumer Disputes The Ministry of Economics prepared draft laws, the Law on Resolvers of Out-Of-Court Consumer Disputes and the Amendments to the Consumer Rights Protection Law (submitted to the Saeima on 9 April 2015), to promote consumer protection by providing consumers the possibility to use and protect their legal rights using independent, fast, efficient and fair out-of-court solution options. These draft laws will implement the requirements of the Directive 2013/11/EU of the European Parliament and of the Council of 21 may 2013 on alternative dispute resolution for consumer disputes and amending Regulation (EC) No 2006/2004 and Directive 2009/22/EC, and will ensure compliance with the principles laid down in the OECD Recommendation C(2007)74 on Consumer Dispute Resolution and Redress of 12 July 2007. The draft Law on Resolvers of Out-Of-Court Consumer Disputes prescribes setting requirements for out-of-court resolvers of disputes who wish to examine disputes between consumers and sellers or service providers. The draft law sets the following requirements for resolvers of out-of-court consumer disputes: (1) availability; (2) competence, independence and objectivity; (3) transparency of activities; (4) efficiency of the process; (5) fairness and legitimacy. When the requirements of the law are fulfilled, any resolver of out-of-court disputes may be included on the list maintained by the CRPC, which will serve as a certification for the fact that this resolver of out-of- court disputes is competent and sufficiently objective to examine disputes between consumers and sellers or service providers. It is expected that the information on resolvers of out-of-court disputes will be published on the website of the Consumer Rights Protection Centre. The draft law Amendments to the Consumer Rights Protection Law prescribes the creation of the Consumer Dispute Resolution Commission as one of resolvers of out-of-court disputes. The plan is that the Commission as an independent decision-making authority will operate at the Consumer Rights Protection Centre and will secure resolution of disputes arising from contractual obligations of consumers and sellers or service providers (individual disputes of consumers) in the areas, in which no other resolvers of out-of-court disputes meeting the requirements of the Law on Resolvers of Out-Of-Court Consumer Disputes are established and included on the list or if dispute resolvers of the area concerned refuse to resolve the dispute. The draft law envisages that experts from consumer and merchant non-governmental organisations will participate in the decision-making, thus ensuring maximum objectivity in achieving a dispute resolution. Advantages of the Commission: – disputes are resolved faster (90 days) contrary to the current situation, when disputes are resolved within administrative proceedings, which can last up to 3 years; – it is intended to involve experts in the area (representatives of consumer and merchant non-governmental organisations) into dispute resolution; – the dispute resolution process will be less formal and focused on the achievement of an agreement between the parties with regard to the dispute; – the process will be free of charge (today an examination of the product should be performed by the consumer or the merchant depending on the situation).

The right of consumers to contact the CRPC will not change and, like before, consumers will be able to receive consultations and help in dispute resolution. It is expected that these laws will enter into force on 9 July 2015 and the new out-of-court dispute settlement procedure for consumers should be applicable from 1 January 2016.

On 13 February 2013, the Commission proposed a whether to include a mandatory indication of the country package of regulations on safety and market surveillance of origin in the product marking, because Member States of products, which included a proposal for the could not agree on a compromise with regard to the Regulation of the European Parliament and of the principle of the country of origin in the draft Product Council in relation to market surveillance of products and safety regulation. a proposal for the Regulation of the European Parliament Surveillance of Consumer Rights and of the Council on consumer product safety. The The Consumer Rights Protection Centre (CRPC) is drafts aim to significantly improve safety of the products the main coordinating authority in the area of surveillance circulating in the single market and to strengthen market of laws and regulations on consumer protection, and the surveillance with regard to all non-food products. The goal of its operations is to ensure efficient protection of draft of the regulation on consumer product safety consumer rights and interests. To ensure the provides that consumer products must be safe and performance of functions of the authority, the CRPC specific obligations must be imposed on economic implements surveillance of observation of consumer operators, as well as rules should be laid down for the rights (in the area of protection of economic interests of development of standards for support of claims. This consumers and surveillance of observation of consumer new draft of market surveillance regulation is sought to rights in draft agreements and agreements, which harmonise the application of market surveillance rules in consumers conclude with producers, sellers or service various EU Member States, by providing consumers and providers), examines consumer complaints, ensures other users with better protection, as well as reducing the information for consumers and businessmen and administrative burden on economic operators and provides consultations, as well as implements measures to regulate information exchange between market ensure surveillance of unfair commercial practices, e- surveillance authorities. Unfortunately, further commerce and advertisements, licences non-banking development of this package in the European Union has creditors and out-of-court debt collection service stopped, because of a politically disputable matter providers, ensures safety and compliance surveillance

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Box 6.30

European Consumer Protection Conference The European Consumer Protection Conference Future Priorities of Consumer Policy in the Digital Era, organised by the Ministry of Economics in co-operation with the CRPC, was held on 23–24 April 2015 in Riga, within the framework of the Latvian Presidency of the Council of the European Union. The conference brought together high-level policy makers and consumer supervision authorities from the EU, EFTA Member States, OECD representatives, as well as representatives of European-scale consumer and business organisations. During the conference, discussions were held on future priorities in the creation of consumer policies and new challenges, faced by the consumers in the digital environment. Special attention was devoted to matters such as safety of goods and services, problematic markets, strengthening of consumer rights and trust. It was admitted that, to promote cross-border deals and to increase the level of consumer trust, measures to reduce market fragmentation should be implemented, new directions in consumer behaviour and business models should be taken into account and the level of consumer awareness should be increased. During the conference, the participants agreed that in the global and digital environment it is especially important to promote closer and wider co-operation between EU and national legislative authorities, consumer protection associations, as well as business and consumer representatives.

The CRPC set priorities for surveillance of consumer buying online, incl. package travel service offers, rights in 2015 in the areas such as commercial practices in commercial practices in the electronic environment, consumer crediting, commercial practices, when commercial practices in internet shops, when offering providing electrical energy services and beauty products, construction materials, safety guarantees and terms and commercial practices and conclusion of agreements in conditions of agreements proposed to consumers of house management, commercial practices in group package travel service providers.

Box 6.31

CRPC Activities in the 1st quarter of 2015 Within the framework of its activities, in the 1st quarter of 2015, the CRPC provided 9805 consultations to consumers and legal entities. The number of provided consultations grew by 3% compared to the 1st quarter of 2014. When asking for consultations, consumers were most frequently interested in matters related to their rights, in cases when a low-quality product was purchased or a low-quality service was received. Most questions were about actions to be taken, when footwear, mobile phones, electrical appliances that do not meet the provisions of the agreement are purchased or problems with services based on a distance contract and air services are encountered. In some cases the consumers were interested in the advisable actions, if the deadline of product delivery or service fulfilment is not observed. In the same way, consumers ask about the areas beyond the competence of the CRPC or about areas, in which the CRPC is not entitled to take a binding decision, but only to provide consultations, especially on the quality of electronic communication, costs of insurance indemnity, as well as utility services. In the 1st quarter of 2015, the CRPC received 593 consumer complaints, thus there have been no significant changes compared to the 1st quarter of 2014. Most frequently, consumers complained about purchased products and services, which did not meet agreed upon conditions. Many complaints were also received about commercial practices, advertising and e-commerce, and about disregarding the principle of legal equality of parties in agreements. Most complaints about products concern electrical appliances, followed by complaints about mobile phones and the quality of footwear. In the area of services, most complaints concern services based on distance agreements. Problems in the area of rental, utility and air services continue to be relevant. In contrast, in the area of financial services, the number of received applications has dropped by 22%, which is explained by the improvement of solvency of the population and the state-implemented policies for improving the consumer crediting system and the regulatory framework.

In the three months of 2015, 46 cases were initiated Latvia is a member of the European Consumer Centre about the violation of collective interests of consumers, Network (ECC-NET), which is operating within the incl. in the areas of commercial practices, advertising, e- Consumer Rights Protection Centre with the support of commerce and terms and conditions of agreements. The the European Commission. In the 1st quarter of 2015, cases were mainly initiated in relation to commercial 197 consultations were provided on cross-border practices and terms and conditions of agreements in the problems within the EU and 47 complaints were area of crediting services, when offering food examined on cross-border problems within the EU. The supplements, in the area of e-commerce, commercial population mostly contacted the ECC Latvia in relation practices in the area of collective purchases, commercial to cross-border online purchases, which can be explained practices and terms and conditions of agreements in the by an increased activity of the consumers in using the area of electrical energy. Licensing and re-registering of advantages provided by the internet environment for licences of creditors, which do not meet that status of a their purchases. credit institution, and debt recollection service providers, The CRPC set the following priority directions in as well as regular surveillance of businessmen continues. market surveillance in 2015: the improvement of safety The European Consumer Centre (ECC Latvia) and compliance of products in areas such as construction continues to provide support and information in case of products, electrical appliances, machinery, pressure unsuccessful EU cross-border purchases. The ECC

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 154 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY vessels, radio and telecommunication terminal 14 manufacturing, trade and service provision companies, equipment, and toys. A project for the inspection of where 213 measuring instruments were subjected to the dangerous equipment – surveillance of the use of lifting national metrological surveillance. equipment is also planned. Metrological surveillance of in-can products in the Taking into account the tragic events of 2013, when segment of alcoholic beverages was last performed in the roof of a supermarket collapsed, and the results of 2007, and, since then, the number of producers of inspections in the area of construction products, where alcoholic beverages in Latvia has dropped, while the significant non-compliances were found at all inspected number of companies importing and distributing construction sites, as well as during tests of construction alcoholic beverages has grown. Since Latvia is responsible materials, the surveillance and activities to raise public for metrological control of products with “e” marking, awareness, which started in 2014, continues in 2015, to which are placed in the EU market for the first time, a improve the level of awareness and professional draft plan for metrological control of alcoholic beverages competence of merchants and persons involved in the was prepared, according to which, 6 producers of construction process. alcoholic beverages and 29 distributors and importers of

Surveillance activities to inspect measuring devices, alcoholic beverages were identified in 2015. In the 1st such as non-automatic weighing instruments, electrical quarter, the control of products was carried out in energy meters and heat meters are planned as a part of 11 companies. Violations of regulations with regard to national metrological surveillance in 2015. In the 1st the actual amount of in-can products were stated in quarter, the CRPC evaluated the compliance of 5 batches of in-can products. measuring instruments with regulatory requirements in

6.14 Quality Assurance

6.14.1 Quality Structural Policies – maintenance and international comparison of the national base of metrology benchmarks to ensure traceability of necessary measurements, and to The main task of public authorities in the area of protect the population from incorrect quality assurance of products and services is to promote measurements; correct application and observation of the requirements – promotion of the implementation of quality of regulations in the regulated and non-regulated area, as management, environment and other voluntary well as to improve the regulatory framework according to management systems in companies, to ensure EU requirements, taking into account the needs of the production of high-value products, provision of national market and national economy, ensuring the services and to promote the competitiveness of compliance of products and services, promoting the Latvian merchants in international markets; growth of competitiveness of businessmen and the – promotion of efficient market surveillance, to reduction of cross-border trade barriers. ensure equal conditions for all market participants In Latvia, the system of quality infrastructure is and to protect consumers from potential unfair mainly regulated by the Law On Conformity Assessment, the competition of merchants. Standardisation Law, the Law On Uniformity of Measurements, and related laws and regulations. Main policy directions: 6.14.2 Accreditation, Standardization, – ensuring and improving the conformity Metrology assessment infrastructure (incl. testing and calibration laboratories, inspection and Functions and tasks of national standardisation, certification authorities, environmental verifiers) accreditation and metrology bodies are performed by the according to the needs of the Latvian economy, to bureaus of Limited Liability Capital Company protect people and the environment from non- “Standartizācijas, akreditācijas un metroloģijas centrs” compliant products and services, to promote (Standardisation, Accreditation and Metrology Centre), which is competitiveness of businessmen and trust in supervised by the Ministry of Economics: the Latvian producers and service providers; Standardisation Bureau (LVS), the Latvian National – improvement of the respective reference and Accreditation Bureau (LATAK) and the Metrology advisory framework; Bureau (LATMB). – ensuring the membership of national accreditation, standardisation and metrology Standardisation bodies in international organisations, by According to the Standardisation Law, the LVS as a maintaining their international recognition and the national standardisation organisation supervises and compliance of the Latvian quality assurance coordinates operations of Latvian merchants and infrastructure to international requirements; organisations in the area of standardisation. Main

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 155 – functions of the LVS are to register Latvian standards The General Assembly of European standardisation and to form and maintain the collection of Latvian organisations and the 4th European Standardization standards in co-operation with international and Summit were held in Latvia on 3-5 June 2015. The topic European standardisation organisations. The LVS has of the summit How standardisation can contribute to a cleaner been a full-fledged member of the European Committee and smarter economy is based on priorities of the presidency: for Standardization (CEN) and the European Committee sustainability, growth and involvement. The summit for Electrotechnical Standardization (CENELEC) since focused primarily on the construction sector and 2004, and became a full-fledged member of the comprised such prospects of the sector like the energy International Organization for Standardization (ISO) on efficiency of buildings, sustainable construction, 1 January 2015. The LVS is also an associate member of construction of smart cities, and building design and the International Electrotechnical Commission (IEC). management. According to the approved plans, priority directions According to CEN/CENELEC Guide 20:2013A, a of business of the LVS are distribution of standardisation working plan for MRMC recommendations regarding the information, supplementation and maintenance of the LVS self-assessment was submitted to CEN/CENELEC collection of Latvian standards, improvement of the this April. electronic system of sales of standards, co-operation with Documentation is gradually prepared for the international, European and national standardisation implementation of and certification according to LVS organisations. EN ISO 9001:2009.

378 standardisation documents, incl. 282 European To facilitate students’ access to the necessary standards adapted to the status of Latvian standards, were technical documents during their studies, online reading st registered by the LVS in the 1 quarter of 2015. of Latvian standards was provided in libraries of the Riga 19 standards, incl. 8 Eurocodes, were translated into Technical University, the Rezekne Higher Education Latvian. 11 national annexes to Eurocodes were drafted Institution and the Fire Safety and Civil Protection and registered. Standardisation information services were College. Online reading rooms for the reading of provided to 1010 legal and natural persons. 5 seminars standards were also created for employees of the for businessmen on construction standards and the Consumer Rights Protection Centre, the State Building European Standardisation Summit were organised with Control Bureau and the State Fire and Rescue Service. the Latvian Chamber of Commerce and Industry and the Standards can also be read at the National Library of State Building Control Bureau. Latvia. 2 applications were received from interested parties, Additional information about standardisation is regarding the creation of a new standardisation technical available on the LVS website www.lvs.lv. committee (STC) – “E-invoice” and “Management of projects, programmes and project portfolios”. Interested Accreditation persons are being identified and coordinated. The LATAK ensures the operation of the national Within the framework of the concluded co-operation accreditation authority, according to the Regulation agreement on exchange of information with the Official No 765/2008 of the European Parliament and of the Gazette “Latvijas Vēstnesis”, lists of applicable standards Council. are published on the website www.likumi.lv and on the The LATAK ensures the compliance of the LVS website www.lvs.lv in Section Standarti likumdošanā accreditation system with the European Accreditation (Standards in Legislation), providing users of standards (EA) Multilateral Agreement (MLA) in seven areas: with information about mandatory and applicable – accreditation of testing laboratories (ISO/IEC standards listed in laws and regulations. 17025), including accreditation of medical An e-commenting website www.viedoklis.lvs.lv has been laboratories (ISO 15185); created and is maintained, where businessmen and – accreditation of calibration laboratories (ISO/IEC experts of sectors can voice their opinion on draft 17025); Latvian and European standards. The public commenting – accreditation of product certification bodies (ISO website was developed within the framework of the 45011/ISO/IEC 17065); European Entrepreneurship and Innovations – accreditation of bodies certifying individual programme. persons (ISO 17024); A new distribution system of standards was created. – accreditation of inspection bodies (ISO/IEC It provides detailed information about standards, their 17020); development and their link to the Latvian and European – accreditation of management system certification law. For the convenience of businessmen, a new bodies (ISO/IEC 17021); notification system was created, which allows receiving – accreditation of verifiers of greenhouse gas the necessary information abou changes in the specific (GHG) emission reports and tonne-kilometre standard or any group of standards. The new system also reports (ISO 14065). allows reading standards and provides other services.

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Accreditation as a tool for acknowledging Priorities in activities and planned measures in the competence and trust is included in more than area of accreditation for 2015: 120 national regulations. In addition, the LATAK ensures – to promote the accreditation of all medical accreditation of verifiers of eco-management and audit laboratories by the end of 2015; schemes (EMAS), according to the Regulation (EC) – to start the process of LATAK’s accession to No 1221/2009 of the European Parliament and of the ILAC/IAF; Council of 25 November 2009 on the voluntary – to improve surveillance of conformity assessment participation by organisations in a Community eco- bodies; management and audit scheme (EMAS). – to improve co-operation with supervisory To constantly ensure compliance with the set authorities, professional organisations in the requirements and harmonise accreditation procedures conformity assessment area and with market among EA members, LATAK employees participate in operators. all EA’s technical committees and working groups, Council meetings of the Multilateral Agreement and EA Additional information on accreditation and General Assemblies, as well as EA’s comparative accredited bodies is available on the LATAK website evaluations of national accreditation bodies of other www.latak.lv. states. Metrology LATAK employees also participate in meetings The purpose of the LATMB as the Latvian national organised by the Forum of Accreditation and Licensing metrology body is to ensure and develop credibility and Bodies (FALB) and in comparative evaluations of FALB traceability of the country’s measurements. The of other states in the EMAS area, as well as meetings and Metrology Bureau fulfils the tasks set by the Law On trainings in the area of the Good Laboratory Practice, Uniformity of Measurements in the area of metrology. organised by the Organisation for Economic Co- Within the framework of maintaining the national operation and Development and the Commission. benchmarks of units, the national benchmarks of units The LATAK has contributed to the participation of are calibrated at EU’s national metrology institutes national laboratories in international inter-laboratory (NMI). testing programmes and has organised tests of In May 2015, national benchmarks of electrical units capabilities. were calibrated in the Finnish NMI “Mikes”. Training seminars for conformity assessment bodies The list of approved types is regularly updated on the and experts involved by LATAK are organised. website of the Metrology Bureau. The growth in the number of accredited institutions The Regular review of the Metrology Bureau’s quality in the recent years is an evidence of the importance of management system was prepared in the first half of 2015 the accreditation process and stability in the conformity and submitted for evaluation to the Technical Committee assessment area. An increasing number of bodies choose for Quality (TC-Q) of the European Association of to certify their competence by accreditation. Many bodies National Metrology Institutes (EURAMET). Instructions extend their area of operations. Currently 264 accredited for the improvement of the system were received as a bodies are maintaining their accreditation status. result of the presentation of the quality management Simultaneously, accreditation is maintained for three system. Necessary measures to maintain international laboratories in the Russian Federation, one laboratory in recognition of calibration and best measurement Kazakhstan and three laboratories in Azerbaijan. In capabilities were carried out using the database (KCDB) addition, within the framework of interstate co-operation, of the International Bureau of Weights and Measures co-operation is maintained with national accreditation (BIPM). institutions of Georgia, the Russian Federation, Belarus, 14 reference benchmarks and 2 mass comparators of Moldova and Ukraine. SIA “Latvijas Nacionālais metroloģijas centrs” (Latvian st In the 1 quarter of 2015, the LATAK started National Metrology Centre) were calibrated. accreditation in 3 new areas, i.e.: In 2015, the Metrology Bureau continues to maintain – inspections of electric safety and testing and co-operation with the EURAMET, as well as the assessment of conformity of functions of International Organization of Legal Metrology (OIML) radiological devices (regulated area); and the European co-operation in legal metrology – accreditation of industrial energy auditors (WELMEC). In the years to come, the plan is to (regulated area); participate in measurement comparison projects – photometric, colorimetric measurements for organised by the EURAMET, as well as to take part in luminaries (non-regulated area). the bilateral measurement assessment project organised in Serbia. The climate provision system will be improved to enhance the stability of measurements. Additional information about the LATMB is available on the website: www.latmb.lv.

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6.15 Privatisation

The aim of privatisation is to create a favourable on 1 September 2005, the Law on Completion of Privatisation environment for private capital operation in the interests of State and Municipal Property and Use of Privatisation of the development of the Latvian national economy and Certificates (Privatisation Completion Law), adopted by the to narrow the commercial activity performed by the state Saeima, came into force stipulating the completion of the and local governments, by changing the owner of state or privatisation process and land reform and the completion local government property. of the use of privatisation certificates (see Box 6.32). Taking into the consideration that the aim of mass privatisation implemented in Latvia is basically achieved,

Box 6.32

Law on the Completion of Privatisation of State and Local Government Property and Use of Privatisation Certificates The Privatisation Completion Law determines: – the term – 31 August 2006, until which each legal or natural person could propose a transfer of any state or local government property for privatisation; – the procedures, according to which a proposal for privatisation submitted by a person shall be examined, and a decision on the transfer of state or local government property for privatisation is adopted; – that a transfer for privatisation, and preservation of a property in the ownership of a local government can be refused in case of property which is necessary for the performance of a state administration function, or state or local government business activity; – that decisions on the transfer for privatisation of state or local government property regarding which an ownership dispute has arisen or it corresponds to a status of an abandoned property, is adopted after coming into force of a court judgement; – that the state joint stock company “Latvenergo”, the state joint stock company “Latvijas Pasts”, the state joint stock company “Starptautiskā lidosta “Rīga””, the state joint stock company “Latvijas Dzelzceļš”, the state joint stock company “Latvijas Gaisa Satiksme” and the state joint stock company “Latvijas valsts meži” are not subject to privatisation or alienation; – the term until which the persons who want to redeem the land allocated for permanent use, must submit a land redemption request to the State Land Service (30 November 2007), the term until which a respective land boundary plan or certification on making a land redemption payment in privatisation certificates before the conclusion of a land redemption agreement (1 September 2008), as well as an application for the adoption of a decision concerning the transfer of land into ownership for a charge (31 August 2011), and that a land purchase agreement had to be concluded until 30 December 2011; – that privatisation certificates do not have a specific period of validity, however, they can be used only within the framework of the privatisation process; – the procedure according to which allocation of privatisation certificates is terminated. The deadline determined for individuals is 28 December 2007, until which they could submit an application for allocation of privatisation certificates.

To ensure a successful and open privatisation completion process, the Cabinet of Ministers has adopted a procedure on how the institutions which perform privatisation and land reform must develop a publicly available register for privatisation proposals and land redemption.

Privatisation of State Property Objects and Land privatisation proposals are registered in the privatisation According to the Law on Privatisation of Objects of State proposals register, which have been incorrectly submitted and Municipal Property, privatisation of state property to other public or local government institutions before objects and land is performed and privatisation proposals the abovementioned date, and later have been forwarded are processed by the state joint stock company to the Privatisation Agency on the basis of jurisdiction. “Privatizācijas aģentūra” (Privatisation Agency). The Cabinet of Ministers has not yet examined A decision on the transfer of a state property object, 4 privatisation proposals which have been received including capital shares and an undeveloped plot of land, concerning state property objects, as their examination is for privatisation is adopted by the Cabinet of Ministers, currently encumbered by legal problems. whereas the Privatisation Agency adopts decisions on the The Privatisation Agency received privatisation transfer of a developed plot of land on which buildings proposals for 79 property objects, ownership of which and structures owned by another person are situated. The have not been clarified. The Privatisation Agency is decision is adopted on the basis of a privatisation authorized to address a court or a notary on behalf of the proposal submitted by any natural or legal person. Republic of Latvia in order to recognise these property From 1 September 2005, when the Privatisation objects as abandoned property or escheat. The Completion Law came into force, until 30 April 2015, the Privatisation Agency has not addressed the court register of privatisation proposals of the Privatisation concerning 12 property objects, as these property objects Agency has registered 636 privatisation proposals for real are owned by a local government or a private person, or estate, 57 privatisation proposals for state capital shares it is established that such a structure does not exist on and 4490 proposals for privatisation of plots of land or site. The Privatisation Agency has addressed the court privatisation continuation. After 31 August 2006, those concerning 67 property objects in order to establish a

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 158 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY legal fact and recognize objects as abandoned property which 144.72 million euros in cash and 142.09 million pertaining to the state. The legal proceedings have been euros in property compensation certificates. completed in 54 of such cases and a court judgement has The state property which is not transferred for come into force satisfying an application of the privatisation can be alienated according to provisions of Privatisation Agency and establishing a legal fact that real the Law on Alienation of the Property of a Public Person and the estate is abandoned and is pertaining to the state. In 13 Law on the Management of Capital Shares and Enterprises of instances, an application of the Privatisation Agency has Public Persons. been left without examination on the basis of Section 258 Procedure for the Privatisation of Residential of the Civil Procedure Law, because a dispute about Houses rights has arisen within special proceedings, therefore, The procedure for privatisation of residential houses such dispute must be solved in court in a claim of the state and local governments is stipulated by the procedure. After the delivery of court judgements on the Law on Privatisation of State and Local Government Residential recognition of a property as abandoned, draft orders of Houses. According to the Law on Privatisation of State and the Cabinet of Ministers are prepared on the transfer of Local Government Residential Houses, the privatisation of property objects for privatisation, or justified refusal to state residential houses is performed by the state joint transfer property objects. The Cabinet of Ministers has stock company “Privatizācijas aģentūra”, whereas the already adopted a decision for 25 property objects privatisation of local government residential houses is concerning the transfer for privatisation or refusal to do performed by a commission for privatisation of so. residential houses in cities and regions. In three instances, the privatisation had to be As of 30 April 2015, the Privatisation Agency had the suspended, as legal problems were detected which following in its possession and under its management: prevent the privatisation of state property objects. – 241 residential houses; Whereas in four instances orders on termination of – 1329 state apartment properties of which: privatisation of a state property object have been issued – 700 state apartment properties are located in by the Cabinet of Ministers, as there were no applicants houses possessed by the Privatisation Agency; for the privatisation of respective objects or no applicant – 629 state apartment properties are located in was approved as a buyer. residential houses transferred for the A subject of privatisation of state-owned property management of owners of apartment (real estate, capital shares, land) can be a natural person properties. or legal person having the rights to acquire movable property or real estate in Latvia. Payments for property Procedure for the Privatisation of State objects are made in the euro currency and/or Residential Houses privatisation certificates. In the period from 1 November 2014 until In the period from 17 April 1994 until 30 April 2015, 30 April 2015, privatisation in 20 state residential houses regulations on privatisation of 2547 state property objects has been initiated on the basis of decisions adopted by (excluding land) have been approved in compliance with the Board of the Privatisation Agency. the procedure stipulated by the law. 94 companies have In the period from 1 November 2014 until been transformed into public joint stock companies, 30 April 2015, 34 notices have been sent to the tenants of issuing 439.14 million shares in public circulation. During state apartments to be privatised, and 72 agreements on this period, income of 2.380 billion euros has been the purchase of apartment property have been concluded obtained from privatisation of state property objects following the procedure stipulated by the Law on (excluding land and sales of shares obtained as a result of Privatisation of the State and Municipality Residential Houses. debt capitalization, and alienation of capital shares and apartments), including 578 million euros for privatisation Procedure for the Management of Residential certificates with a nominal value of 1.802 billion euros. Houses and Apartments The new owners have overtaken the obligations of From 1 November 2014 until 30 April 2015, 15 privatised public companies in the amount of more than residential houses have been transferred for the 280.86 million euros. The amount of determined management of owners of apartment properties. investment was 214.23 million euros, whereas the amount From 1 November 2014 to 30 April 2015, 10 state of actual investment constitutes 383.01 million euros. apartment properties have been transferred into Since 1997, the Privatisation Agency has been ownership of municipal and regional local governments. handling the privatisation of state-owned plots of land. Privatisation Certificates 5287 plots of state-owned land have been privatised A privatisation certificate is a state-granted as of 30 April 2015. The total price of privatised plots of dematerialised security, which can be used only once as land owned by the state constitutes 291.48 million euros, means of payment for a state or local government 145 million in cash and 146.48 million euros in property property to be privatised. compensation certificates. Income from privatisation of According to Regulations on Delegation of the plots of land by 30 April 2015 — 286.81 million euros, of Administrative Task of Privatisation Certificates Circulation adopted by the Cabinet of Ministers on 1 April 2014, the

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 6. ECONOMIC POLICY AND PRIORITIES OF STRUCTURAL POLICY – 159 – state joint stock company “Privatizācijas aģentūra” has companies, 4896.4 thousand for land in rural areas, 969.8 been delegated to perform the state administration task in thousand for housing properties, 816.0 thousand for land the framework of which granting, issuance, use and in towns, 461 thousand for companies and other redemption of certificates is controlled, as well as other property objects, 89.8 thousand for property alienation operations are performed related to the monitoring of the from politically repressed persons, 85.6 thousand for circulation of certificates. unlawfully alienated property. The granting and use of privatisation certificates is According to Section 27 of the Privatisation performed in accordance with the Law on Privatisation Completion Law, 58.2 thousand persons have lost their Certificates. 2.4 million people have been granted a total of rights to transfer 1.64 million privatisation certificates to 112.38 million privatisation certificates as of their account in the period from 1 December 2007. 30 April 2015. 103.58 million of these certificates have In compliance with the Law on Land Privatisation in been granted for the time resided in Latvia, whereas Rural Areas, by 30 April 2015, 11,076 decisions have been 794.7 thousand privatisation certificates have been adopted on the disbursement of a monetary granted to 41.4 thousand politically repressed persons. compensation for former land properties in rural areas. 117.2 thousand former owners or their heirs have been The compensation has been paid to 8411 persons in the granted 8.01 million property compensation certificates, total amount of 25.04 million euro, redeeming 0.63 including 691.7 thousand for property preserved for the million property compensation certificates. state needs in privatised specialised state agricultural Table 6.9

Use of Privatisation Certificates (as of 30 April 2015) Number of Privatisation Including the number of Property Type of Property Quantity Certificates Compensation Certificates (million) (thousand)

Residential houses 446 thousand apartment privatisation objects 38.0 589.8 Companies and other properties no precise data 7.3 109.6 Capital shares (shares) no precise data 44.5 954.0 including: Total: 107.3 6820.1 % of the total number of granted certificates 95.5% 85.1%

By redeeming 165.73 thousand privatisation 10.02 thousand privatisation certificates in April, and certificates granted for political repressions, monetary from 0.16 thousand property compensation certificates in compensations in the amount of 6.6 million euros have January to 0.71 thousand property compensation been disbursed to 26.23 thousand politically repressed certificates in February. persons by 30 April 2015. According to Section 28 of the On 30 April 2015, in privatisation certificate accounts Privatisation Completion Law, 3.5 thousand politically of 379.18 thousand natural persons, there were 2.255 repressed persons have lost their rights to redeem 16.16 million privatisation certificates or 2% of the total thousand privatisation certificates. amount of granted privatisation certificates, including 107.32 million privatisation certificates or 95.5% of 0.105 million property compensation certificates. In the total amount of granted certificates have been used privatisation certificate accounts of legal persons there for the privatisation of state and local government were 0.334 million privatisation certificates or 0.3% of property (see: Table 6.9) by 30 April 2015. During the the total amount of granted privatisation certificates, privatisation process, from 1 April 2008 until including 0.006 million property compensation 30 April 2015, 752.48 thousand privatisation certificates certificates. have been used instead of 601.77 thousand property On 1 January 2014, Amendments to the Law on compensation certificates. Privatisation Certificates came into force stipulating that the In April 2015, owners of privatisation certificates handling of privatisation certificate accounts is the task of were able to use the services of 8 licensed brokerage the state administration. These amendments also companies for the execution of transactions on the determined that the Cabinet of Ministers is entitled to market of privatisation certificates. The total monthly delegate natural persons for handling privatisation amount of transactions with privatisation certificates certificate accounts in instances and according to the (purchase from natural persons and sales) performed by procedure specified in laws and regulations. Starting from brokerage companies by 30 April 2015, fluctuated from 1 January 2014, the state joint stock company “Latvijas 4.78 thousand privatisation certificates in January to Attīstības finanšu institūcija “Altum”” was delegated to

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 160 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY perform the task of handling privatisation certificate Paragraph twelve of Section 23 of the Privatisation accounts, which includes opening and maintenance of Completion Law, this deadline does not apply to former privatisation certificate accounts, transfer of privatisation land owners or their heirs for whom the total area of plot certificates into the account and other services related to of land determined as a result of a cadastral survey is the handling of privatisation certificate accounts and larger than the land area on which the ownership shall be circulation of privatisation certificates. Until 1 June 2014, renewed, and it exceeds the permissible error margin, the above mentioned service was also provided by the during the land cadastral survey. Agreements with these insolvent joint stock company “Latvijas Krājbanka”, persons are concluded by the Development Financial which is holding a part of the privatisation certificate Institution, which has been delegated the state accounts. As of 1 June 2014, Latvijas Krājbanka no longer administration task of concluding agreements on handles privatisation certificate accounts, however, it has redemption (purchase) of rural and urban land, control an obligation to maintain the privatisation certificate execution of these agreements and transfer unredeemed accounts it holds until the f centralised transfer of these land into the ownership of local governments according accounts to the Development Financial Institution. The to the Procedure for Delegation of the State Administration persons who plan to perform transactions with Task – Conclusion of Agreements on Redemption (Purchase) of privatisation certificates held in privatisation certificate Land, Control of Execution of These Agreements and Transfer of accounts in Latvijas Krājbanka have to visit any of the nine Unredeemed Land into Ownership of Local Governments of branches of the Development Financial Institution and 14 April 2015. fill in an application for a transfer of privatisation During the land reform, in the period until certificate accounts to the Development Financial 30 December 2011, the Mortgage Bank had signed Institution. The persons who currently do not plan to 174,231 agreements on rural area land regarding 181,945 perform transactions with privatisation certificates do not land units with the total area of more than 1.2 million have to take the above mentioned measure, because hectares. privatisation certificate accounts held by Latvijas By adopting the last decision on the recognition of Krājbanka will be transferred to the Development ownership of land intended for the completion of the Financial Institution centrally. land reform on 25 August 2014, the Central Land

The Land Reform Commission (the CLC) has completed the last land The main goal of the land reform is to reorganize reform completion task – the process of ownership legal, social and economic relations for the use of land renewal in rural areas for land intended for the and property from command economy to market completion of the land reform, implementation of which economy. was stipulated in Paragraph one of Section 16 of the Law The process of the land reform includes requesting on Completion of the Land Reform in Rural Areas. and granting the free land pertaining to the state, renewal In total, the CLC approved the rights to be eligible of ownership and redemption (purchase) of land granted for a renewal of ownership of land intended for for use, as well as renewal of ownership of land intended completion of land reform for 1066 persons (claimants) for the completion of land reform, and these processes regarding land with the total area of 12,982.64 ha. take place in relation to the land reform of rural areas and Taking into consideration that for the corroboration towns to be implemented in the state. of ownership in the land register, a land cadastral survey The option to request land in towns in compliance has to be done and a decision of the respective institution with Paragraph one of Section 2 of the Law on Completion on the renewal of ownership has to be obtained, the of the Land Reform in Cities was terminated already on CLC, the State Land Service and local governments 1 March 1999, whereas the granting of land requested in continue adopting decisions on the renewal of ownership compliance with Paragraph two Section 2 of this law had to former land owners or their heirs, as well as granting to be terminated on 1 July 1999, and in Riga and of land to the ownership for a charge in cases when the Daugavpils on 1 October 1999. total area of land determined during the cadastral survey According to Paragraph two of Section 2 of the Law exceeds the area for which ownership to these persons is on Completion of Land Reform in Rural Areas, requesting of renewed. the free land pertaining to the state was terminated on Although, taking into consideration the above 1 June 2006, whereas granting of the requested land for mentioned circumstances the land reform tasks can be permanent use – on 1 September 2007. considered as completed, pursuant to Section 5 of the Furthermore, transfer of land into ownership for a Law on Completion of the Land Reform in Rural Areas and charge has ended in towns and rural areas. According to Section 7 of the Law on Completion of the Land Reform in the Privatisation Completion Law, a land redemption Cities, the land reform will be deemed completed upon (purchase) agreement with the state joint stock company the adoption of a decree by the Cabinet of Ministers on “Latvijas Hipotēku un zemes banka” (Mortgage Bank) on the completion of the land reform in the territory of the urban or rural area land granted for use had to be respective local government. concluded until 30 December 2011. According to

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With regard to towns, according to Section 6 of the 30 November 2014. It must be noted that the preparation Law on Completion of the Land Reform in Cities, by of a report is possible only when the respective local 30 November 2014, the respective local government had government has adopted all decisions related to to prepare and coordinate with the State Land Service a requesting land and examination of requests, and after report on the performance of works specified in laws and the adoption of relevant decisions, reflected in the regulations governing the land reform, which must be National Real Estate Cadastre Information System. submitted together with a declaration of completion of Before the deadline, out of 110 territories of rural areas, the land reform to the State Land Service for the the State Land Service managed to coordinate the report preparation of the respective draft decree by the Cabinet on land with four (4%) local governments (Adazi, Ludza, of Ministers. Before the abovementioned deadline, out of Olaine and Zilupe), concerning three of which draft 76 towns, the report had been coordinated and the decrees of the Cabinet of Ministers have been announced decision for the completion of the land reform in the at the meeting of State secretaries. After this deadline, as respective town had been adopted by 30 (39%) town of 12 May 2015, the State Land Service has coordinated local governments, out of which a decree of the Cabinet the report with another 45 (41%) town local of Ministers has been adopted for territories of 5 towns governments, for 27 of which draft decrees of the (Olaine, Ligatne, Ludza, Preili and Zilupe), and draft Cabinet of Ministers have been announced at the meeting decrees of the Cabinet of Ministers concerning 25 towns of State secretaries. have been announced at the meeting of State Secretaries. Thereby, it can be concluded that by 12 May 2015, After this deadline, as of 12 May 2015, the report has the land reform has been completed (i.e. a decree by the been coordinated and the decision for the completion of Cabinet of Ministers has been adopted) for 6% of towns, the land reform in the respective town has been adopted the last stage of the land reform completion is near the by another 27 (36%) town local governments, for 15 of end (i.e. decrees of the Cabinet of Ministers are in the which the draft decrees of the Cabinet of Ministers have process of adoption) in 53% of towns and 27% of rural been announced at the meeting of State Secretaries. territories, the last stage of the land reform completion is With regard to the land of rural areas, pursuant to started (i.e. preparation of decrees of the Cabinet of Paragraph four of Section 4 of the Law on Completion of the Ministers has been initiated) in 16% of towns and 17% of Land Reform in Rural Areas, the report on the land has to rural territories, whereas work on the completion of the be prepared by the State Land Service and coordinated land reform continues in 25% of towns and 56% of rural with the respective local government by territories.

6.16 Reform of Management of Commercial Activity and Capital Shares of Public Persons

The state of Latvia fully or partially owns a significant According to the information available to the Ministry number of capital enterprises, which have a significant of Economics, there were 323 capital enterprises in impact on the national economy, i.e. according to the Latvia in 2011 with the local government being the sole financial data at the end of 2012, it amounted to 18.2% of participant (local government capital enterprises), 39 the Latvian gross domestic product. The capital capital enterprises are under decisive influence of a local enterprises owned by the state hold considerable assets government and, in 243 instances, a local government and the largest employers in the country are among these owns 50% or less capital shares in a capital enterprise. 4 capital enterprises. Therefore, the state must follow the local governments do not participate in any capital results of operation of capital enterprises owned by it in enterprise. order to promote responsible, efficient and results-based At the meeting held on 15 May 2012, the Cabinet of management of capital enterprises, and to increase the Ministers approved the Concept on Commercial Activity of value of these capital enterprises in the future. Public Persons and the Concept on Management of State Capital Furthermore, operation of individual local government Shares, developed by the Ministry of Economics in capital enterprises has a significant role in providing compliance with the principles determined in the OECD certain services in the respective administrative territory. guidelines for the management of state capital According to the information available to the Ministry enterprises. The goal of the reform in the management of of Economics, by 1 May 2015, 100% participation of the capital shares of public persons is to promote return on state is observed in 66 capital enterprises, decisive capital and to introduce good principles of corporate influence in 5 capital enterprises, whereas in 46 capital management in the management of capital enterprises, as enterprises the state participation constitutes 50% or less. well as to reassess the conditions for commercial activity The state has direct participation in 117 capital of a public person. Through implementation of the enterprises in total. reform of capital shares management it is expected to

REPORT ON THE ECONOMIC DEVELOPMENT OF LATVIA | JUNE | 2015 – 162 – 6. ECONOMIC POLICY AND PRIORITIES OF THE STRUCTURAL POLICY achieve a higher return on capital (higher dividends), and about achievement of financial and non-financial publicly available information about management of goals determined for capital enterprises (see Box 6.33). capital shares and capital enterprises owned by the state,

Box 6.33

Commercial Activity of Public Persons Involvement of public persons in commercial activity creates a risk of market distortion. Therefore, commercial activity of public persons is permissible only in exceptional cases when there is a specific justification for such activity. The main economically justified goal for participation of a public person in capital enterprises is prevention of market shortcomings, consequently, improving the financial standing of the company. The restrictions of commercial activity laid down in Section 88 of the State Administration Structure Law are determined for achieving a legitimate goal, namely, that a public person, without causing market distortion, could operate as an equivalent partner to the private business only in cases when such activity is required for ensuring implementation of safety functions and the state policy in any area of the public life. However, in practice these restrictions are very often interpreted too broadly, consequently, the state and municipalities have business in sectors, which are, formally, in compliance with the conditions specified in Section 88 of the State Administration Structure Law, however, by their nature, they conflict with the purpose of this regulation, that is to limit commercial activity of a public person. On 26 March 2015, in the second reading, the Saeima adopted amendments to the State Administration Structure Law, stipulating changes in the conditions under which a public person is entitled to establish a capital enterprise or participate in an already existing capital enterprise. The draft law is being prepared for examination in the third reading.

The Reform of Commercial Activity of Public Persons provides for the following: – to amend the conditions for commercial activity of a public person (amendments to the State Administration Structure Law); – a public person must establish general strategic goals that it wants to achieve by participating in a capital enterprise and which arise from legal acts and documents of policy planning. Non-financial goals of the enterprise for a medium term are derived from the general strategic goals defined by the public person, which are integrated in the medium-term strategy of the capital enterprise (this is integrated in the Law on Management of Capital Shares and Capital Enterprises of a Public Person); – an obligation of a public person to reassess its participation in capital enterprises and its compliance with the principles applied on commercial activity of a public person at least once in five years, adjusting the general strategic goals respectively, if necessary (this is provided in the Law on Management of Capital Shares and Companies of a Public Person); – to establish that a capital enterprise of a public person must be transformed into an institution (a public agency), if it is established that the status of a capital enterprise is not the most adequate model of operation for achieving certain goals by participation of the public person in a capital enterprise (this is provided in the Law on Management of Capital Shares and Capital Enterprises of a Public Person).

Management of State Capital Shares In Latvia, there is a decentralized model of management of state capital shares, and management of state capital shares is implemented through mediation of the holder of capital shares, i.e. the ministry of the respective sector, or any other institution. By analysing the practice of management of state capital shares, implemented in Latvia before the reform, several major problems were detected, for example, the holder of state capital shares simultaneously performs multiple roles (customer, owner and the sector policy- maker in one person), low return on capital, no transparently defined financial and non-financial goals to be achieved, and indicators of companies are not analysed and assessed in relation to these goals, uniform and transparent management of state capital shares is not provided, and, in addition, there is a lack of professionalism in the management of state capital shares (including attraction of professionals), there is no single monitoring system, which could promote improvement of the environment of commercial activity, there is fragmented and incomplete regulation of management of state capital shares, and politicisation of daily management decisions.

In order to introduce solutions, approved by the tasks of the coordination institution for management of Cabinet of Ministers and suggested in the concepts, the state capital shares, determined in the law (at the meeting Ministry of Economics has developed a package of draft held on 12 May 2015, the Cabinet of Ministers adopted a laws, which was approved by the Cabinet of Ministers at decision to assign the Cross-Sectoral Coordination the meeting held on 28 May 2013, and submitted for Centre as the coordination institution), determination of consideration to the Saeima. On 16 October 2014, in the goals for participation of a public person in capital third (final) reading, the Saeima adopted the Law on enterprises, development of a medium-term operation Management of Capital Enterprises and Capital Shares of Public strategy for a capital enterprise and regular assessment of Persons, which came into force on 1 January 2015. The results achieved by a capital enterprise, implementation improvements integrated in this law are applicable to the of requirements for the information openness, management of all capital enterprises (capital shares) preparation of annual reports on the management of owned by public persons. capital shares owned by the state, rights of formation of a The Law on Management of Capital Shares and Capital council of major capital enterprises, management of the Enterprises of a Public Person provides that the Cabinet of procedure of nominating transparent applicants for Ministers shall assign an institution which will perform positions of members of the board and council, etc.

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6.17 National Economy Council

The National Economy Council (NEC) of the Ministry of Economics, the Agreement on cooperation in the Ministry of Economics is an advisory body created by the National Economy Council concluded on 17 February 1999 founding organisations of the NEC (Ministry of and Ministry of Economics’ regulations of NEC No 1-7- Economics, Latvian Chamber of Commerce and 33 of 29 August 2013. Industry, Latvian Association of Local and Regional To contribute to the professional representation of Governments, Free Trade Union Confederation of interests of sectors, as well as to improve co-operation Latvia, Employers’ Confederation of Latvia), and it between the Ministry of Economics and other state participates in the resolution of matters related to bodies, the NEC invites sectoral associations business policies and acts according to Sub- representing businessmen of their sectors and their paragraphs 6.11 and 7.2 of Regulations No. 271 of the interests, as well as independent experts – economists, Cabinet of Ministers of 23 March 2010 Regulations of the education and science representatives.

Box 6.34

NEC’s Staff and Work Organization Based on the decision of the Management Committee, the NEC’s staff is approved by the Minister of Economics. By the order of the NEC, the Minister of Economics expresses the NEC’s opinion in the Council for Coordination of Large and Strategically Important Investment Projects and the Council for Coordination of Foreign Economic Policies, as well as in other cross- sectoral forums. The NEC Management Committee is an advisory and coordinating body, which participates in the resolution of business policy related matters and is in charge of the evaluation and approval of the NEC’s plan of work and agendas of NEC’s sessions, as well as the ensuring and improvement of NEC’s work efficiency. The staff of the Management Committee is approved by the Minister of Economics. The Management Committee consists of the Minister of Economics and four representatives of NEC’s founders who are also members of the NEC: – a representative from the Free Trade Union Confederation of Latvia; – a representative from the Employers’ Confederation of Latvia; – a representative from the Latvian Association of Local and Regional Governments; – a representative from the Latvian Chamber of Commerce and Industry.

The NEC Management Committee may invite representatives whose competence corresponds to the matters examined during sessions (such as the Foreign Investors’ Council in Latvia, the Latvian Academy of Sciences, the Cooperation Council of Farmers’ Organisations, relevant public bodies and community organisations). The NEC consists of 28 experts proposed by the NEC Management Committee, including the Minister for Economics, the NEC’s Chairperson and representatives of organisations of businessmen, public structures and other organisations. Representatives from the Foreign Investors’ Council in Latvia, the Riga Technical University, the Cooperation Council of Farmers’ Organisations, the partnership “Association of Latvian Markets”, the Latvian Academy of Sciences and the Latvian Chamber of Crafts participate in NEC’s sessions as observers. NEC’s founders decide on changes in or extension of the composition of the NEC at sessions of the NEC Management Committee. The NEC is managed by the chairperson of the council who is elected from the members of the NEC Management Committee on a rotating basis. The mandate period is one year. NEC’s sessions are held on average once a month. The work of the NEC is ensured by the Secretariat of the National Economic Council, whose activity is ensured by the Ministry of Economics. In between NEC’s sessions, the NEC Management Committee takes recommending NEC’s decisions.

To improve the model of cooperation between the Ministry of Economics and the non-governmental sector and to arrange the advisory mechanism, on 28 April 2012 the NEC Management Committee decided on the improvement of the NEC’s structure by creating six sub-committees of the NEC, whose functions and tasks are to unite the advisory committees created by the order of the Ministry of Economics, to contribute to the dialogue about significant criteria of creating policies for a business-friendly environment in Latvia between the Ministry of Economics, the Minister, other ministries and non-governmental organisations, as well as to ensure the implementation of the sustainable national economy development principle and to promote the process of sustainable development of the country and public participation in this process. The NEC Management Committees evaluated and developed this model for the NEC to ensure discussions about important and secondary matters with regard to a comprehensive economic policy and to review them within structured sectoral committees, which are acting directly or indirectly in co-operation with the non-governmental sector.

The NEC’s structure includes six committees: – Internal Market Committee; – Competitiveness Committee; – Energy Committee; – Construction and Home Policy Committee; – Tourism Committee; – Micro, Small and Medium-Sized Enterprises Committee.

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The purpose of operations of the NEC is to shape activities of the NEC, the Ministry of Economics and the and implement policies for a business-friendly Ministry of Finance to promote economic growth, environment in Latvia, as well as to contribute to the employment and competitiveness of Latvia, and active implementation of the sustainable national economy participation in the development and implementation of a development principle and public participation in it, to sustainable strategy in Latvia. identify circumstances hindering business and to take all To professionally represent the interests of the necessary actions to eliminate them, to participate in the sectors of the national economy in an efficient dialogue development of laws, regulations and policy planning with the Ministry of Economics, the NEC and other documents promoting business, to promote innovation organisations of businessmen and public authorities, the and foreign trade. Ministry of Economics has created a co-operation model The NEC reviews and traces the resolution of such with the sectors of national economy. matters and draft regulatory documents, economic The NEC reviews proposals of institutions and development concepts, state budget and other associations representing businessmen for the documents, which are important for the development of improvement of legislation. Sectoral associations evaluate Latvian economy. The NEC prepares proposals and and express their opinions on draft laws and regulations. takes recommending decisions on these matters. The The Ministry, in its turn, informs those who draft laws NEC maintains a dialogue between businessmen and the and regulations about the proposals for the improvement Ministry of Economics, as well as other public bodies and of legislations, which were submitted by the NEC, as well community organisations. as takes other actions to implement programmes for the The decisions taken by the NEC serve as a development of national economy and improvement of recommendation only. business environment within the framework of the The NEC co-operates with the Cabinet of Ministers government declaration. and other public bodies to achieve the inclusion of Today, the National Economy Council represents proposals necessary for the improvement of business associations of 15 sectors (chemistry and environment into the regulations prepared by the pharmaceuticals, finances, transport – transit, logistics, responsible authorities. energy, information and communication technologies, IT On 21 May 2009, the NEC, the Ministry of clusters, trade, electric engineering, electronics, light Economics and the Ministry of Finance signed a industry, wood processing, machinery and metalworking, Memorandum of Co-operation for Growth, Competitiveness construction, tourism, hotels and restaurants, food, and Employment. The purpose of the Memorandum of Co- printing, education and science, agriculture). operation is co-operation between and coordinated

Box 6.35

The NEC on the Priorities of the Economic Policy The NEC believes that the work on ensuring a stable macroeconomic environment and general growth in the national economy of Latvia must be continued. To promote competition in Latvia, a balanced budget should be created, surveillance of competition should be strengthened and the development of competition in all sectors of national economy should be promoted in the interests of the society, by timely identifying risk sectors, where violations of competition rights are possible and by limiting administrative and other obstacles in the way of competition. The NEC believes that tax policies and administration, education of workforce, macroeconomic stability and unforeseeability of changes in laws and regulations continue to be problem sectors. Pending laws and regulations should also be evaluated to identify and prevent potential violations of competition rights, technical barriers to trade and discriminatory rules in the area of free movement of goods and services and business rights. Surveillance of state aid and procurements should be improved by achieving a high level of transparency for state aid projects. The creation of an efficient and competitive structure of sectors should be promoted; research, development and innovation, especially in the private sector, should be stimulated, measures, which would promote co-operation between education, research and national economy sectors, should be developed and implemented, ensuring a transfer of knowledge and technologies. Faster use of structural funds, and entering into new export markets, as well as reinforcement of positions in the existing markets should be promoted. An institutional framework to promote exports should be provided and its capacity should be increased, as well as the development of foreign economic representations, the availability of financial instruments and support for companies in export marketing should be provided.

By signing a memorandum of agreement, the parties framework of the government declaration; the parties agreed to combine resources for the development of also agreed that sectoral associations will evaluate and programming documents, to take actions to implement express their opinions on draft laws and regulations national economy development and business developed by ministries. environment improvement programmes, within the

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In the first half of 2015, 3 sessions of the National – proposals for the restoration of support to Economy Council took place, and the following promote the use of renewable energy resources; important matters were reviewed: – Energy Sector Development Guidelines 2014-2020; – preparation and approval of a draft letter asking to – the Energy Union and the latest news in the EU restart the work of the Reform Management energy sector, latest news in energy policies within Group, which should review the matter of the framework of the Latvian Presidency of the amendments to the Law On Taxes and Fees in Council of the European Union; relation to the application of responsibility of – development of electric energy connections, incl. members of the board; within the context of the Programme for funds – tax discounts for social guarantees of employees from the European Structural Funds developed included in the collective bargaining agreement; by the Ministry of Environmental Protection and – progress of the implementation of activities of Regional Development; existing EU funds, supervised by the Ministry of – the need for the NEC Energy Committees to Economics in the 2014-2020 programming develop a list of standards, which would be period; approved by the Cabinet of Ministers for – reduction of electrical energy costs for energy operation of electric energy sites; intensive companies in the manufacturing; – Sections 50 and 51 of the Energy Law – potential changes in the future.

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7. RECOMMENDATIONS

In the post-crisis period, the economic advantages of venture capital funds requires the resources of Latvia were mainly based on low labour costs and sectors private investors; of low-technology industries, and it should be taken into – for developing a knowledge-intensive economy: account that in the coming years the increase of the – to promote cooperation between scientists and labour costs is inevitable due to the growth and open entrepreneurs by supporting competence centres labour market. It means that Latvia may lose its in order to promote co-operation between the competitiveness in low-cost segments faster than it research and manufacturing sectors in acquires any advantages in the production of products of implementing industrial research, developing new higher added value. Thus, it is necessary to promote the products, and technologies, as well as to support structural changes of economy in favour of the the creation of a technology transfer system for production of goods and services with higher added promoting the increase in the income of scientific value, including the increase of the role of industry, institutions from the commercialisation of state- modernization of industry and services, and development funded research, and to promote the introduction of complexity of export. This is an essential prerequisite of research results in production; for the convergence of the Latvian economy with – to support the development of new products and developed EU countries and for the growth of the technologies, including those that contribute to population welfare that can be achieved by increasing the energy efficiency, reduction of emissions, and competitiveness of the Latvian economy that is based on lower consumption of resources and raw innovation. It should be noted that such transformation materials, by encouraging entrepreneurs to of the economy requires not only strengthening of the implement industrial research and introduce new innovation system, but also significant qualitative changes products, services, and technologies in in the education system – formal education and further production; education of adults (lifelong learning system) to create the – to support the development of the potential of necessary prerequisites for structural changes. science more actively by concentrating it in the At the same time, in order to ensure a stable areas where Latvia has comparative advantages; economic growth, it is equally important to continue implementing measures to improve the business – for promoting export: environment, especially those related to the institutional – to continue supporting the participation of framework (legislation, tax policy and support entrepreneurs and their unions in international institutions) and the improvement of infrastructure. It is exhibitions and trade missions, in order to foster also crucial to maintain a stable macroeconomic the entering into new markets; environment. A fair business environment should be – to develop and expand the network of the Latvian promoted to prevent the restriction of competition on foreign economic representation offices, thus the market both by entrepreneurs and by public persons. providing the Latvian entrepreneurs with a range The fight against tax evasion should be continued by of state export support services broadly and easily supporting the authorities in charge and addressing the accessible on export markets; causes of the problem. – to activate economic cooperation with the prior

Taking into account the above mentioned, in our and potential export markets of Latvia, as well as opinion, the immediate tasks of the economic policy are to improve the economic contractual legal base as follows: between countries;

– for ensuring access to finance: – to continue ensuring access to export credit – to provide access to finance at all business guarantees in order to increase access to higher development stages, particularly, at the business risk markets and to promote the export of the start-up stage; Latvian goods and services;

– to continue issuing loan guarantees. It is necessary – to continue the work on the reduction of trade to provide enterprises with a possibility to access barriers the Latvian entrepreneurs face on both credit resources for commercial activities in case the EU internal market and external export of insufficient security for attracting the necessary markets, thus promoting the exportability of the amount of credit resources; Latvian enterprises; – to develop venture capital instruments for stimulating investments in the development and expanding activities of enterprises; financing of

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– for ensuring access to labour force and improving taxes and accounting. To continue the work on the supply: improving and streamlining legal proceedings by – to timely identify a mismatch between the labour introducing an electronic document exchange supply and demand according to the development system in courts. To promote the electronic trends of the labour market by providing registration of business start-ups with the Register information to education policy makers; to of Enterprises; improve cooperation between various institutions – to develop a mechanism for the establishment of in implementing proactive changes in the labour industrial areas to ensure the coordinated and market; result-oriented development of industrial areas in – to improve the lifelong learning system to prevent regions to foster entrepreneurship and to attract the current mismatch in the labour market and to new local and foreign investments; reduce risks of structural unemployment; – to restructure the tax system, by making it more – to increase the attractiveness and quality of socially fair and business-friendly. It must be vocational education by matching it to the labour achieved that the tax burden on entrepreneurship market demands; and employment is reduced; – introduce traineeships in the working – to reduce shadow economy by supporting fair and environment as a method for implementation of honest entrepreneurs and providing favourable vocational education, at the same time improving conditions for a transition to official economy, to the professional competency of traineeship continue transforming the SRS into an institution supervisors in educational institutions and that helps the entrepreneurs; companies; – to revise the participation of a public person in – to pay particular attention to the youth who are business activities and implement a reform of neither studying, nor working in order to return capital shares management and business activities them to the education system for obtaining of public persons; qualification and practice; – to promote the development of e-government – to encourage active involvement of employers in and e-services. To reduce the risks of improving the quality of education – establishing implementing projects of information systems and traineeship positions, participating in the e-services by strengthening the administrative development and improvement of education capacity and competence of customers and programmes, as well as in the development and monitoring of project implementation. The implementation of active labour market policy functionality of the e-signature must be expanded, measures; accessibility to e-services must be provided, and – to develop interdisciplinary education/study the usage of electronic procurements must be programmes focusing on developing the business facilitated; competence; to increase the role of hard sciences – to ensure the introduction of the one-stop agency and natural sciences in basic and secondary principle with regard to the availability of the state education; and local government services. To introduce a – to develop 1st stage vocational higher education one-stop agency principle in the registration of (college) studies; real estate data, thus ensuring data exchange – to review the legal framework of employment between the National Real Estate Cadastre relations, by enhancing flexibility opportunities Information System and the State Unified between the employer and the employee; Computerised Land Register; – to promote a match between training and the – to develop an up-to-date legal framework of the labour market demands by improving (changing) construction process and new construction the current planning system of labour training, standards, including the adaptation of the revising the current methodology for short-term Eurocode standards into the system of regulatory forecasting of the labour market, and the enactments governing the construction sector, procedure for defining training directions to take and to improve the Construction Informative into account the medium-term forecast of the System, thus creating pre-conditions for the labour market, as well as the medium-term and development of a sustainable and competitive long-term development objectives of the national construction sector; economy; – to improve the mutual coordination of data and terms for entering data in the state registers and – for improving business environment and other information systems and to ensure a ensuring competitiveness: maximally complete and quick update of – to develop an excellent business environment. information stored in the registers in order to – to ensure implementation of electronic prevent discrepancy of information between the registration of immovable property in Latvia. To registers and the actual situation, as well as to draft a new Annual Accounts Law in the field of

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avoid repeated requests of information from construction, industrial, domestic market, etc., but respondents; also in the area of natural resources, including – while prioritising, to actively address the most renewable energy resources, agricultural severe violations of the Competition Law – manufacturing and processing policy areas prohibited agreements and abuse of the dominant (agricultural policy, forestry policy, fisheries position in the market. As regards the above policy), environmental, regional transport, and mentioned violations, particularly the communication policy areas; identification of cartels, preventive measures are – to promote and support energy efficiency in of high importance by performing inspections on multi-apartment buildings, public buildings, the priority markets and implementation of a industrial buildings by developing a sustainable leniency programme promoting participation of financing model for improving energy efficiency; market participants in the disclosure of violations – to improve the criteria and define the objectives of competition; regarding the construction of low or nearly zero – to improve the regulation of a merger report energy consumption buildings; review to ensure a more qualitative public service. – to promote public awareness of various methods It is particularly important to foster the and practices for improving energy efficiency of coordination of the regulation with neighbouring buildings, to promote the application of good countries to reduce the amount of information to practice of energy efficiency of buildings to public be provided, promote the awareness of market sector buildings; participants and develop explanatory guidelines, – to develop a framework of regulatory enactments thus ensuring a faster and less-resource intense for the implementation of energy efficient policy process for submission and review of reports; in Latvia and start a consistent implementation of – to implement measures for promoting free and such policy; fair competition within the regulatory framework of the sectors (including the legislation drafting – for ensuring efficient, safe, and sustainable process), to reduce unjustified requirements, energy supply: restrictions and other administrative impediments – to continue the integration of the Latvian for companies to enter the market and operate electricity market in the common EU market and there that negatively affect the competition and in liberalisation of the Latvian market of natural gas the long-term – consumers; by promoting the implementation of energy – to prevent deformation of competition done by infrastructure development projects, particularly public persons by involving in the commercial common interest projects; markets where the market shortage or particular – to continue regional cooperation within the Baltic interest of the state or public does not exist; Sea strategy/BEMIP to improve the energy and gas markets, energy supply security, use of – for improving energy efficiency: renewable resources and energy efficiency, – to make energy efficiency a cross-industry policy – to develop an economically reasonable and objective, by including it not only in the industry flexible policy for the use of renewable energy and service policy areas, for example, energy, resources in the energy production.

A consistently implemented structural policy will promote the recovery of the Latvian economy, which will form the basis for increasing the standard of living of the population. A successful development and economic growth of Latvia will depend not only on the work of public institutions, but also on the personal initiative of any person anywhere in Latvia under the conditions of mutual public understanding and dialogue.

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